Mastering Model Risk and Stress Testing Training Course
Course Highlights and Agenda
This intensive and highly practical programme will give you a thorough grounding in the methodologies behind stress testing. In addition, you will run through a variety of scenarios enabling you to gain the tools and techniques needed to create, analyse and fully understand a wide range of model risk and stress testing models. Attend this unique programme to stay ahead of your game and guarantee that you are prepared for the future whatever it may hold.
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The Black Scholes Model
- Assumptions behind the Generalized Brownian Motion (GBM)
- Different implementations of Black Scholes (e.g. closed form solutions; trees; numerical quadrature; differential equations; Monte Carlo techniques and variance reduction methods)
- The advantages and disadvantages of the various methods
Excel Workshop: Using the various methods
Coping with Complicated Distributions
- Mean reversion
- Jumps and spikes
Case Study: Energy derivatives
Excel Workshop: Extending the Monte Carlo model to handle more complex distributions
Options and Leverage
- Call and put options
- Behaviour of options before expiration and at expiration
- Double and triple ETF's – an alternative to options?
- Assessing the riskiness of option positions
Workshop: Actual vs. log return and the leveraged ETF's
Market Risk Management
- The Greeks: Delta, Gamma, Vega, Theta, Rho etc.
- The idea of VaR
- The various VaR methodologies
- Model risk in VaR calculation
- Criticism of VaR
Workshop: Calculating the Greeks
Workshop: VaR spreadsheet and use it to calculate risks of several portfolios
Stress Testing and Scenario Analysis
- Stress Testing and scenario analysis
- The FSA "stress testing" letter
- The concept of "severe" and "plausible"
- Which scenarios should you choose
- How to design effective stress tests
- Bank stress tests in the US and Europe
Case Study: Examples of stress tests and scenario analysis
Discussion: "The rise of the humans"
The Mark to Market Paradigm
- Understanding the mark to market paradigm
- How Enron abused the "MtM"
- Level 1, Level 2 and Level 3 assets
Case Study: Banks use and "misuse" of these levels in 2008-9
CDS and the Copula Method
- Credit Default Swaps
- The Copula Method
- Gaussian Copula
- Other Copulas
Excel Workshop: The Gaussian Copula
Discussion: Is the Copula model partially to blame for the credit crunch?
Credit Risk Systems
- Credit Risk
- Exposure at Default (EAD), Probability of Default (PD) and Loss Given Default (LGD)
- The major challenges of designing a credit risk system
- The types of Credit Risk Systems
- Input and output parameters
Excel Workshop: Delegates will use the CreditRisk+ to analyze risks in various portfolios. Outline of original research by John Hull, Alan White and the speaker on Merton's model, equity volatility skews and credit risk.
Regulation and Credit Risk
- The implications of Basel II for credit risk management
- Basel II approaches: Standardized, F-IRB,A-IRB
- Which approach is "best"
Case Study: Examples of capital requirements under various Basel II methods
Discussion: FDIC is looking for alternatives to credit rating agencies
Discussion: Basel III
Counterparty Risk of OTC Derivatives
- Reserve models
- Credit value adjustment
- Bilateral debt value adjustment
Workshop: Spreadsheet to calculate DVA for an interest rate swap
Discussion: The "Dodd-Frank" Wall Street Reform
- Asian options
- Cliquet options
- Binary options
- Barrier options
Case Study: Differentiating between "dangerous" versus "benign" exotics
More Sophisticated Volatility Models
- The implied volatility surface
- Introducing models with varying volatility (e.g. the Heston model)
- What do volatility models tell us about market risk?
Review: Emanuel Derman's papers on Volatility
More Complex Derivatives
- A review of the derivative landscape
- What will the future hold?
Case study: Model Risk at Goldman Sachs
What You Will Learn
"This was much better than any other course I have attended…The leader was very good…The session on capital issues was very valuable"
"All the sessions and course content was very good as was the leader…Good discussions and exercises…Was excellent compared to other courses attended"