Quantitative Risk Management

Objectives and Learning Outcomes

The aim of the course is to provide practical, hands-on training for those interested in working in risk management and complete their preparation for passing the FRM and PRM certificates, two globally recognized certificates for risk managers. By the end of the class students should be able to perform independent risk modeling and verifications of risk models across major risk classes, understand contemporary risk regulation and the role that regulatory and economic capital, cost of funding and fund transfer pricing play in modern financial institutions.

Lectures

Financial risk classification. Market risk. The concepts of Value-at-Risk and Expected Shortfall. Analytical methods for VaR and CVaR estimation for different asset classes using Gaussian linear and quadratic approximations. Marginal VaR contributions and VaR management. Going beyond the Gaussian models. Historical and Monte Carlo simulations. Extreme value theory. Backtesting VaR models. Regulatory capital for market risk. Credit risk. Probability of default, exposure and loss given default. Scoring, rating-based, structural and intensity-based models for credit risk. Introduction to copulas including one-factor Gaussian copula model. Use of copulas in credit and climate risk portfolio modeling. Economic capital and risk aggregation. Regulatory capital for credit risk under Basel 2, 2.5, and 3. Management of Economic Capital and RAROC. Risk profile of a financial institution. Asset Liability Management, cost of funding and fund transfer pricing. Analyzing integrated risks on in-depth treatment of convertible bonds.

Exercises

A series of computer-based exercises. Estimating market risk VaR and CVaR for different types of asset classes (equity, interest rate products, derivatives). Comparing option VaR calculations for different analytical approximations with full Monte Carlo simulation. Credit scoring, Credit rating validation, Iterative solution algorithm of the Merton model, CDS valuation. Modeling of credit-risk related loss, correlated defaults and copulas. Calculating Risk Weighted Asset for a financial product. IFRS 9 regulation and its implication for risk modeling. Assessment of the impact of macroeconomic factors on bank’s default rate and the share of non-performing loans. Credit risk stress testing. Practical problems facing risk managers. Development of a risk dashboard. Practical problems in Asset-Liability management. Design, valuation and risk assessment of convertible bonds.