Market Activities: Risk Measurement

Technical fundamentals

• Introduction to types of risk.
• Common technical foundations of market risk assessment.
• Defining risk indicators (sensitivity, duration, etc.).
• Linear and non-linear positions.

Practical case: calculate duration and sensitivity.

Position risks: different VaR calculation methods

• Internal risk management.
• The regulatory approach (Basel II) and capital allocation.
• Overview of Monte Carlo, historical and analytical VaR.
• Foreign exchange, equity, interest rate and commodity risks.

Practical case: estimate VaR for a position and a portfolio.

• Valuation risks.
• Derivatives: delta, gamma and vega VaR.
• Developments in position risk regulation: stressed VaR, incremental risk charge and Basel III.

Counterparty risk in market transactions and credit risk

• Technical foundations and operational aspects: what is counterparty risk?
• Counterparty risk types: credit, market movement, settlement-delivery and issuer risks; definitions and analysis.

Counterparty risk measurement and calculation methods: current exposure method and internal models method (Effective Expected Positive Exposure).
Practical cases: measure counterparty risk using both methods, accounting for master netting agreements and CSA agreements.

Introduction to credit VaR (economic capital models) and regulatory capital (standardised and IRB approaches).
Differences between economic and regulatory approaches.
Practical case: calculate and compare regulatory capital requirements for a derivatives portfolio and a credit portfolio using different approaches.

• Identify the different objectives.
• Control a client's positions through cascading limits.
• Determine a credit spread.
• Calculate profitability and economic capital.
• Control country risk.

Practical case: calculate a client's probability of default from CDS market prices.
Practical case: calculate transaction profitability, RAROE (Risk Adjusted Return on Equity) and EVA (Economic Value Added).

Basel III developments in counterparty risk

Exposures to clearing houses: calculations, methods and principles.
Practical case: calculate initial and variation margin and the capital requirement for the default fund.

• CVA: a value adjustment for future counterparty risk; definition, scope and calculation.
• Overview of CVA VaR required by Basel III.
• Other developments: increased margin period of risk, stressed EEPE and wrong-way risk.