Duration: 3 days
 The Role of VaR in Risk Management
 Recent Regulatory Initiatives for VaR
 Measuring the VaR of Linear and NonLinear Instruments
 Simulation Approaches to Measuring VaR
 Principal Components Approach to Measuring VaR
 Forecasting Volatility and Correlation
 Stress Testing and Extreme VaR
 Building and Implementing Risk Management Systems
The objective of this seminar is to give the participants a good understanding of how to measure
and use “ValueatRisk” (VaR) in risk management.
We will start with a general discussion of the role of VaR in modern Risk Management, explaining
why this measure is becoming ever more important in today’s fast moving financial markets. We will
also give a thorough overview of the recent regulatory initiatives for using VaR for capital
adequacy purposes. We will then turn to an indepth explanation of how to measure VaR. We will
begin with basic linear assets such as stocks and bonds, and continue by explaining how VaR can be
calculated for complex portfolios using analytic (variance/covariance) as well as historical and
Monte Carlo simulation approaches. We will also show how VaR calculations can be speeded up using a
sophisticated principal components approach. Next, we will explain how volatilities/correlations
are extrapolated from historical data using mathematical/statistical techniques such as GARCH and
EWMA, or how they can be backed out from option prices, etc. We will also explain how VaR measures
can be adjusted to account for “fat tails”. Moreover, we will explain how the risk of losses
following extreme events can be quantified through “Stress Testing” and “Extreme VaR” measures. We
will also present the “Major Pitfalls in Using VaR”. Finally, we will explain how an effective,
integrated realtime risk management system can be built around VaR methodology, demonstrating how
VaR can be used defensively in setting and controlling limits as well as more proactively in the
active allocation of risk capital among business units.
Day One
09.00  09.15 Welcome and Introduction
09.15  10.00 ValueatRisk in Risk Management
 VaR and the Evolution of Risk Management
 Types of Risk that Can be Measured Using VaR
 Regulatory Capital Standards with VaR
 Buildings Blocks in VaR
 Problems in Using VaR
10.15  12.00 Measuring VaR (I)
 Steps in Constructing VaR

Measuring VaR for SinglePosition Linear Instruments
 Stocks
 FXpositions
 Zero coupon bonds
 Exercises
12.00  13.00 Lunch
13.00  16.30 Measuring VaR (II)

Measuring VaR for Portfolios of Linear Instruments
 Position mapping
 Correlation and portfolio volatility
 VaR for asset portfolios
 VaR for assets/liabilities

VaR for Linear Derivatives Positions
 FRAs and Deposit Futures
 Bond Forwards and Futures
 FX Forwards
 Interest Rate and FX Swaps
 Exercises
Day Two
09.00  09.15 Recap
09.15  12.00 Measuring VaR (III)
 Measuring VaR for NonLinear Positions
 Local versus Full Valuation
 DeltaNormal Method
 Full Valuation
 DeltaGamma Approximation
 Historical Simulation Methods

Monte Carlo Simulation Methods
 Building blocks in Monte Carlo simulation
 Constructing and simulating the SDE
 Sampling from multivariate distributions
 Simulating payoff profiles
 Calculating percentiles/VaR
 Using Monte Carlo Simulation and Principal Components Analysis
 Exercises
12.00  13.00 Lunch
13.00  16.30 Forecasting Volatilities and Correlations
 TimeVarying Risk or Outliers?

Modeling TimeVarying Risk
 Moving averages
 GARCH estimation
 Longhorizon forecasts
 The RiskMetrics approach (EWMA)

Modeling Correlation
 Moving averages
 Exponential averages
 Crashes and correlation

Using Options Data
 Exercises
Day Three
09.00  09.15 Recap
09.15  12.00 Backtesting VaR Models
 Setup for Backtesting
 Model Backtesting with Exceptions
 Decision Rule to Accept or Reject Model
 Model Verification: Other Approaches
 Case: Backtesting in Basel
 Conditional Coverage Models
 Examples and Exercises
Stress Testing
 Why Stress Testing?
 Implementing Scenario Analysis
 Generating Unidimensional Scenarios
 Multidimensional Scenario Analysis
 StressTesting Model Parameters
 Managing Stress Tests
12.00  13.00 Lunch
13.00  16.15 Building and Implementing Risk Management Systems
 Using VaR to Measure and Control Risk
 Using VaR for Active Risk Management
 VaR in Investment Management
 The Technology of Risk
 VaR and Liquidity Risk
 Operational and Integrated Risk Management
 VaR, Economic Capital and RAROC
 Exercises
16.15  16.30 Evaluation and Termination of the Seminar