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Event Location

Instructor

Instructor: Prof. Bernard S. Donefer
Hours: 9:00 am - 4:30 pm; Registration/Breakfast begins at 8:30 am

Balancing risk and reward is the job of all asset managers.  Unfortunately, they may not be successful and too often we read of hedge funds, banks and securities firms imploding;  we have all heard of Barings, Long Term Capital Management, All First and, more recently, Societe Generale and Bear Stearns.  As a result, international financial organizations led by the Bank for International Settlements (BIS) have recommended policies to minimize these occurrences and protect investors.  

This program will alert participants to varieties of risk at portfolio and enterprise level, estimating its impact, and best practices for managing it.

  Who should take this seminar?

• Portfolio and asset managers, traders, bank, hedge fund and securities firm management, compliance officers and back office operations staff all need a good understanding of risk management concepts and their regulatory and technical drivers.  

• Investors concerned about the safety of their assets. 

• Anyone who needs to answer the question:  If today is a bad day, how much can we expect to lose.   Is our return appropriate to the potential losses?  What are the sources of the risk and what could I be doing to better control those risks? 

This class is not aimed at financial engineers looking for hedging and trading strategies, but for those managers responsible for implementing risk systems or understanding the risk reports they are given.   It is a pragmatic course aimed at practitioners who must deal with regulators, client’s board members or senior management.  It does not require advanced mathematical expertise, but relies on middle school algebra and basic statistical concepts. 

 What will you learn?

• You will be able to identify all the major risk categories. 

• How Value at Risk, (VaR), is computed and, more importantly, what questions to ask to ensure you understand its implications to your portfolio. 

• What are the recommended best practices by the Basel II Accord?   How to look at risk management as an enterprise activity. 

Several cases will be examined and implications identified.  Excel spreadsheets will be provided so that participants can review concepts demonstrated in class.  All class notes and readings are provided, including guide to additional sources  (books, articles and websites).

Topics to be covered include:

Day 1

Topic 1 Background

·        --What risks can we manage? 

·         --Categorize and define market, credit, liquidity, model and operational risk

·         --Importance of context in defining risk

   Barings Bank case – How a sophisticated 225 year old international bank was brought down.  What happened, how did it happen and what lessons can we learn from their experience.

Topic 2 Regulatory Environment

·         --Why regulate?   Who is being protected?

·         --Basel II Accord – What is it? Who created it? Whom does it impact?  

·         --How do we satisfy its requirements - best practices?

   AllFirst (AIB) case – How did a Maryland bank lose $650M while under US regulation?  How this case compares to Barings and the previous lessons learned?

 Topic 3 Value at Risk Concepts

·       -- Review of basic statistical concepts

   --The normal distribution, mean, variance, standard deviation and correlation

·        --How do we measure risk?  Market volatility?

·        --Risk Adjusted Return on Capital (RAROC)

·        --What is Value at Risk (VaR)?  How to calculate it for a single security

·        --Calculating VaR parametrically

·        --Aggregating VaR over different time horizons

         Excel exercise to graph volatility, calculate VaR

 Topic 4 Advanced Value at Risk

·            --Back testing and stress testing - how good is your VaR model?

·            --Calculating multi-asset (portfolio) VaR

·            --VaR decomposition – using marginal VaR to identify the impact of changes to a portfolio

        --Excel exercise 2 asset VaR and VaR decomposition

·                        --How to use this data to manage a portfolio’s risk

Baring’s revisited – What VaR would tell us about Nick Leeson’s portfolio

·            --Comparing VaR calculation methodologies

·                --What is Monte Carlo simulation and how is it used?

   Excel exercise to create a Monte Carlo simulation of stock prices

 Day 2

 Topic 5 Extreme Events – Worst Case Situations

·            --Fat tail (worse case) analysis using GARCH and Extreme Value Theory (EVT)

·            --Stress testing

·            --Model risk

·            --What’s wrong with VaR?

·            --Multifactor Risk Models – another way of calculating VaR using relationships and themes

 Topic 6 Credit Risk

·             --What is Credit Risk?  What are the different types?

·             --Estimating probability of default (PD)

·            --Credit rating models

            --Subjective – CAMEL or the 5 C’s

            --Objective – Z score, CreditMetrics, KMV, Kamakura

·           -- Basel II capital requirements for credit risk

·        --How credit default swaps work

Topic 7 Liquidity Risk

·        --Liquidity risk is the hidden killer.

     Long Term Capital Management case– How did a firm filled with experts and two Nobel Prize winners almost bring down the world’s financial systems? What new lessons have we learned?

 Topic 8 Operational Risk

·        --What is the BIS definition

·        --Categorizing op risks: Key Risk Indicators (KRIs)

·        --Basel II Op Risk best practices

--Example of an op risk system

·        --Using Six Sigma and Balanced Scorecard techniques in op risk management

 Wrap up, summary and sources of further information.