Financial Risk Management

Syllabus

• Risk versus uncertainty; asset prices and returns as stochastic processes.
• Models of asset price dynamics: geometric Brownian motion, future price and return distributions, and the comparison of theoretical and empirical distributions.
• Modelling multiple risk factors: dependence structures and Cholesky decomposition.
• Market risk: concepts, measurement, risk measures, coherent risk measures and the value-at-risk of a single asset.
• Methods for calculating value-at-risk: parametric, historical and simulation-based approaches.
• Value-at-risk for equities and equity portfolios; volatility measurement and time scaling.
• Risk factors affecting bond prices; value-at-risk for bonds under different models of yield-curve movements.
• Market risk of derivatives and options: derivative pricing models, risk factors of derivatives, value-at-risk methods for options, and exercise probabilities in the Black-Scholes-Merton model.
• Capital regulation for market risk under the Basel framework, European regulation and the Capital Requirements Regulation; standardised and internal model approaches; FRTB.
• Standardised calculation of capital requirements for market risk: position risk, decomposition into risk factors, bond and equity position risk, and additional capital requirements for options.
• Evolution of Basel regulation: Basel I and Basel II; credit-risk capital requirements, PD, LGD, EAD and risk-weight functions.
• Credit risk measurement: actuarial approaches, estimation of default probabilities, CDS pricing, conditional and unconditional default probabilities, and survival probabilities.
• Structural credit-risk models: the Merton and KMV models, distance to default, expected default frequency and practical applications.
• Credit value-at-risk and rating-based approaches: the CreditMetrics methodology, transition matrices and transition probabilities.
• Counterparty credit risk: central versus bilateral clearing, the role of central counterparties, derivative counterparty risk, CVA, DVA and risk mitigation tools.
• Operational risk: definition, Basel II capital calculation methods, the advanced measurement approach and subsequent regulatory changes.
• Systemic risk: measurement approaches, core-periphery models, model calibration, coreness measures and basic concepts from network theory.
• Stress testing: scenario analysis, reverse stress testing, regulatory applications and practical examples.
• Enterprise risk management: the ERM concept, cash-flow-at-risk, earnings-at-risk and simulation of correlated risk factors.