Measuring and Managing Market Risk

Course objectives

  • Understand market risk and its measurement
  • Learn to calculate VaR on several positions
  • Understand the rationale of stress-tests

Market risk parameters

  • The case of bonds: duration and convexity
  • The case of equities
  • The case of options:
    • Greeks
    • Delta hedging
    • Interdependence of Greeks: Trader's P/L = Theta profits - Gamma losses

Case study (Excel): Delta hedging an FX position

Objective: Understanding the gamma/theta relationship is key to options risk management. The participants go through realistic price moves, delta-hedging an options portfolio along the way.

Value at Risk

  • Risk and Bank governance
  • The role of limits
  • VaR concept: confidence interval, horizon
  • Modelling market prices
  • Types of VaR, rationale
    • Historical Simulation VaR
    • Parametric VaR
    • Monte-Carlo VaR
    • When to use which model
    • Conditional VaR (CVaR)

Case Study (Excel): Compute HistSim and Parametric VaR for simple portfolio

Objective: To get hands-on experience of how to compute VaR. The exercise will be followed by a discussion on the relative merits of various VaR methods (Parametric/ Monte-Carlo/ HistSim

  • Treatment of optionality

Case Study (Excel): comparison between parametric and Monte-Carlo VaR of an option and its delta-hedging

Objective: to link the two main topics of the day (greeks management, VaR) and further understanding using a real-life example

  • VaR implementation issues
  • Backtesting
  • Stress-tests: rationale and parameters
  • Cross-asset correlations: history, drivers and challenges

Group Discussion: assess pair-wise cross-asset correlations

Case Study: City of St Etienne liability profile, 2009

Patrice Robin

Patrice Robin

Patrice is an independent consultant on derivatives. Previously, Patrice spent 10 years in trading on interest rate derivatives, then structured products, swaps and vanilla options and became head of interest rate and inflation options in Santander Global Markets in London.

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