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Value-at-Risk

Newly revised and updated in light of the global credit crisis, the course provides up-to-date covering of the latest strategies and techniques for VaR analysis. 

Course Highlights

This cutting-edge training programme will provide you invaluable practical information on:

  • VaR risk capital & regulatory developments
  • Key issues in risk governance, risk management and risk audits
  • Historical simulation methodologies and issues
  • VaRCoVaR methods and issues, expected tail-loss (conditional VaR)
  • Monte Carlo simulation analytics and issues
  • Importance of multi-factor term-structure models
  • Auditing a risk management hedging system of a derivatives book
  • Worked examples of actual implementation

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

Booking Information

Dates Prices Book This Course Discount
02 - 04 Jun 2010
£ 2299
Book the course now.
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24 - 26 Nov 2010
£ 2299
Book the course now.
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Course Programme

VaR: Overview, Risk Capital & Regulatory Developments

  • Motivation - Risk profile of derivatives portfolio
  • Risk governance measurement – Common conceptual framework
  • Headline disasters – Control & poor risk measurement
  • Basel II: Three Pillars & revisions to Basel II
  • Solvency II - Scenario analysis & stress testing
  • Banking regulators and back testing - Tier capital 

Computer Workshop 1
″ Understanding total risk (volatility) measures 

VaR Methodologies

  • Historical simulation (empirical, non-parametric)
  • Variance/CoVariance Matrix (Parametric)
  • Monte Carlo simulation
  • Lattice-Tree approach 

Historical Simulation (VaR/S)

  • Principle assumptions
  • Calibrating the empirical model – Accuracy, extensions (weights)
  • Revaluation issues in portfolio (one-day vs ten-day VaR)
  • Incorporating volatility updating - EWMA, GARCH (1,1)
  • Bootstrap method
  • Extreme Value Theory (EVT) - Estimating tails, power law
  • Expected Tail Loss (ETL) - Fitting Johnson SU distribution 

Computer Workshop 2
″ Historical simulation - Value-at-Risk reports 

Variance-Covariance (Correlation) Matrix (VaR/P)

  • Principle assumptions
  • Estimate volatilities (EWMA, GARCH) and correlations
  • Cash flow mapping (Bucketing, Gridding) algorithm
  • Portfolio aggregation
  • Advantages and issues 

Computer Workshop 3
″ Variance-CoVariance (Riskmetrics) computations 

VaR–Measuring Market Risk: Variance/Covariance Analysis

  • Equity portfolio, treasury portfolio, derivatives portfolio
  • Market risk
  • Variance-covariance matrices
  • VaR of equity portfolio
  • Effect of correlation on overall risk
  • Do VaRs add? Conditional VaR
  • VaR of fixed income sector
  • VaR of derivatives (options)
  • Quadratic model: Delta, Gamma measures
  • Cornish-Fisher expansion
  • Non-normal assumptions 

Computer Workshop 4
″ Variance-Covariance VaR reports for equity, fixed-income and derivatives trading portfolios 

VaR–Monte Carlo Simulation: Cash Market Portfolio

  • Underlying principles
  • Modelling equity price process
  • Box-Muller transformation
  • Polar rejection method 

Computer Workshop 5
″ Monte Carlo simulation - Value-at-risk equity reports
″ Box-Muller transformation
″ Polar rejection method 

VaR–Monte Carlo Simulation: Options Portfolio

  • Applied to options portfolio
  • Why returns are less than expected
  • Risk-neutral (Martingale) insights
  • VaR/S versus VaR/P results 

Computer Workshop 6
″ Monte Carlo simulation applied to options portfolio
″ Appropriate use of Black–Scholes/Merton option pricing model 

VaR–Monte Carlo Simulation: Correlated Assets Portfolio

  • Multiple assets portfolios
  • Modelling correlated stock price processes
  • Independent price processes
  • Perfectly correlated price processes
  • Imperfectly correlated price processes
  • Cholesky decomposition 

Computer Workshop 7
″ Monte Carlo simulation applied to multiple assets portfolios
″ Modelling correlation
″ Cholesky decomposition 

Global Description of Risk: VaR

  • A framework for implementation
  • Key features of VaR system modules
    • Review of recent regulatory developments
    • Interest rate risk framework
    • Market and credit risk
    • BIS Basel system of risk management
    • Measuring interest rate risk
    • Shortcomings of duration approaches 

A Sophisticated Approach to Measuring Interest Rate Risk

  • Accounting for movements in (stochastic) yield curves
    • Level (inflation)
    • Steepness (monetary policy)
    • Curvature (mean reversion)
    • Simulation analysis
    • Modelling of a wide range of yield curve behaviour 

A Two-Factor Approach for Interest Rate Derivatives Flowchart of Risk Management System

  • Stochastic yield curve builder
  • Derivative contracts converter
  • Valuation module: gridding (mapping) option pricing models
  • Risk analyser (PVBP analysis) 

Step-by-Step Worked Example – Actual Implementation in a Leading Bank

  • Principal Component Analysis (PCA) for extracting two factors
  • Estimating volatility and correlation between factors
  • Estimating mean reversion coefficient
  • Generation of stochastic term structures of interest rates
  • State-by-state interest rate scenarios analysis
  • Valuing books of cash flows/derivatives over holding period
  • Valuing interest rate options and swaptions 

Computer Workshop 8
″ Building one-factor stochastic yield curve model
″ Effects and implications for VaR analysis and reports 

Stochastic Two-Factor Model

  • Inputs - Current yield curve
  • Interest rate factors - Short rate and long rate
  • Inputs - Volatilities, correlation, mean reversion
  • Worked example using real term structure
  • VaR toolkit
    • Current yield curve builder mathematics
    • Money market
    • Swap market
    • Futures market
    • Linear stripping
    • Geometric interpolation
  • Generation of interest rate scenarios
  • State-by-state interest rate scenarios analysis 

Computer Workshop 9
″ Building two-factor stochastic yield curve model
″ Effects and implications for VaR analysis and reports 

Value-at-Risk Reports: Swap, Cash, Bond Book

  • Worked example using real swap book
  • VaR toolkit - Swap principal method valuation mathematics
  • VaR toolkit - Gridding and bucketing mathematics 

Computer Workshop 10
″ Value-at-Risk for portfolios of linear risk cash flow instruments: cash, bonds and swaps 

Value-at-Risk Reports: Interest Rate Options

  • Worked example using real interest rate cap book
  • VaR toolkit: Black (1976) valuation mathematics 

Computer Workshop 11
″ Value-at-Risk for portfolios of non-linear risk cash flow instruments: interest rate options (caps and floors) 

Value-at-Risk, PVBP and Risk Management

  • VaR and risk management hedging 

Credit Risk Losses and Credit VaR

  • Estimating credit losses: default probability, recovery rates
  • M-KMV Vasicek and Merton structural models
  • CreditMetrics: correlation and time horizon 

Computer Workshop 12
″ Structural models of credit VaR
″ CreditMetrics VaR