Mastering Model Risk and Stress Testing

With regulators showing increasing concerns around banks' risk management models, this course provides best practice approaches to ensure that your models are robust and able to deal with the current volatile markets.

Course Highlights

Over two intensive days you will:

Understand why market risk models have performed so badly recently – and how to improve them
See what a derivatives pricing model does and doesn’t tell you and how to control the risks around using one
Update yourself on regulatory requirements for market, credit and operational risk stress testing
Learn how to manage valuation risk effectively
Work through detailed case studies on the use of stress testing to reveal portfolio sensitivities that are concealed by VAR
Understand what this means for economic capital calculations

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
20 - 21 Sep 2010	£ 1999		-
21 - 22 Feb 2011	£ 1999		-

Course Programme

Understanding and Using a Derivatives Pricing Model

Greek sensitivities
What is a hedge?
Implied volatility and the term structure of volatility

The Principles of Product Assessment

The varieties of option
Leverage
Risk profiles of options positions
What makes an exotic option dangerous

Black Scholes and the Hedging Argument

Asset price dynamics in a Black Scholes Universe
Deriving the Black Scholes formula
The replicating portfolio
Black Scholes Assumptions

Case study: Black Scholes Hedging and Implied Volatility

Marking

The three levels of FAS 157
Mark verification
The model verification process

Aggregate Approaches to Consolidate Risk

The idea of VAR
Historical and VAR/Co-VAR models
Model risk in VAR calculation

Overview of Stress and Scenario Testing

Scenario testing
Market, credit, liquidity and operational risk stress testing
Stress testing and capital allocation
Effective stress test reporting

Case study: Macroeconomics Stress Tests

Regulation and Credit Risk Stress Testing

VAR models, back-test exceptions and stress testing
IRB models and Basel 2
Credit risk stress testing in Basel 2
Stressing economic credit risk capital models

Models for Exotic Options

The Black Scholes approach for barrier options
Black Scholes hedging
Understanding model risk for derivatives

More Sophisticated Volatility Models

The implied volatility surface
Local volatility
Hedging in a local volatility model
Black Scholes and local volatility hedge parameters
Why local volatility can be problematic
Introducing models with varying volatility
What do volatility models tell us about market risk?

Model Risk

Model selection
Best practice in model risk control
Provision policy
Disclosure
Regulatory issues

Case study: The Assessment of Subprime Mortgage Backed Securities - What went wrong?