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		-
24 - 26 Nov 2010	£ 2299		-

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