Quantifying and Managing the Model Risks Associated to Exotic and Structured Products

Introduction to the 1st and 2nd generations of vanilla and exotic options
  • Focus on equity and FX options
  • Vanilla, Asian and barrier options
  • Complex correlation / multi-asset options, convertibles
  • Risk factors (volatilities, smile, correlation, gap)
  • Focus on fixed-income derivatives
  • Bermudan options
  • Multi-callable
  • Path dependent: Accreting swap, Snowballs, Tarn, Autocall swap...
  • Risk factors analysis
  • Focus on credit derivatives
  • Risk factors (correlation, default, early redemption)
  • Which methods for exotic products?
  • Understanding the products and their risks
  • Know how to be content with imperfect models while making sure that they provide conservative results
Valuation process of complex products
  • Control and valuation of parameters
  • Validating software packages and models
  • Definition of a model for pricing and risk management
  • Definition of model risk
  • Analysing a pricing and risk management model
  • Model vs pay-off adequation
  • Model implementation (choice of numerical method)
  • Stability and convergence of numerical models
  • Model calibration (crucial phase in model implementation)
  • Model exotic parameters
  • Analysis, quantification and management of model risk
  • Numerical implementation risk
  • Parameter risk
  • Specification risk
  • Management of exotic parameters
  • Provisions for model risks
Focus on fixed-income, equity, FX and credit
  • Interest rate models
  • Overview of the main IR models: Black, SABR, HW1F-2F, BGM, HK1F
  • Implementation of IR models
  • Calibration of IR models
  • Equity and FX models.
  • Overview of the main models: B&S, Dupire, Heston, Gaps
  • Implementation of equity and FX models
  • Models calibration
  • Credit models
  • Overview of the main models: intensity, copulas...
  • 1-factor, n-factor models
  • Models implementation: MC, recursive method, FFT...
  • Calibration of credit models
Applications: quantify the model risks of various products and market positions
  • Management of convertible bonds
  • Pricing of equity derivatives with transaction costs
  • Pricing an autocall swap with and without smile
  • Pricing cancellable swaps with variable notional
  • Pricing CDOs, extreme dependency and correlation smile
  • Practical workshop
  • Model risk quantification in EXCEL™, VBA

  • Understand the challenges of models for fixed-income, equities, FX and credit
  • Master the different models used during the seminar
  • Analyse the exotic parameters
  • Master the numerical methods
  • Know how and when to apply the different models
  • Familiarise with the process of model validation
  • Be able to choose and calibrate the appropriate model according to the payoffs
  • Detect the major sources of risk within a model
  • Master the practical applications for the risk management of structured and exotic products: internal models and implementation of risk limits
  • In-depth presentation of pricing models, their use and their limitations
  • Review of the process of valuation of complex products
  • Acquisition of the necessary skills to be able to conceive tools for the risk management of exotic products
  • Risk management
  • Financial directors
  • R&D quants, Risk quants
  • Traders / Managers
  • Audit / Internal control
  • Financial engineers
  • Analysts and strategists
  • IT / Sales
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