Best Practices & Financial Risk

What You Will Learn

• Types of market risk and how hedging of outright price risk results in basis and optionality (aka the “Greeks”) risk.
• Tools used for managing market risk including traditional, position-based tools such as stop loss placement and volumetric limits as well as portfolio-based tools such as mark-to-market, Value-at-Risk, stress testing and fixed fractional money management.
• Application of statistical theories and how they relate to the calculation of Value-at-Risk including assumptions of a normal distribution as well as how non-normal distributions (skewness, kurtosis, and stable Paretian distribution) affect VaR calculations, including
• Extreme Value Theory and GARCH which are specifically designed for measuring the tail of a stable Paretian distribution.
• The models for Calculating Value-at-Risk including the Linear model, the Delta-Gamma model, the Historical Simulation model, and the Monte Carlo Simulation model. A discussion of the pros and cons in the employment of each of the four major types of VaR models is also included.
• The importance of the implementation of broad-based and specific trading controls in order to reduce operational risk.
• Credit risk management issues including various credit risk models (such as CVaR, KMV, Z-Score, Econometric, Actuarial and Rating Agency) and credit risk mitigation tools.
• Portfolio Risk Trading Simulation: Participants will examine market risk of a hypothetical portfolio and familiarize themselves with correlation risk, standard deviations of linear assets, as well as risks of various option positions held within a portfolio.