Market Risk  Measurement, Mitigation and Regulatory Treatment
Duration: 3 days
 Best Practices in Market Risk Management
 Quantitative Tools for Market Risk Measurement
 Measuring and Managing Equity Risk
 Measuring and Managing Interest Rate Risk
 Quantifying FX and Commodity Risk
 ValueatRisk and Stress Testing
 Regulatory Treatment of Market Risk
The objective of this course is to give you a good and practical, “handson” understanding of
strategies, tools and techniques for managing market risks.
We start with a general introduction to market risk and discuss how recent years’ dramatic
developments in financial markets have lead to an increased urgency in managing risk generally. We
review current best practices in market risk management, and we explain the process of identifying,
measuring and managing market risk. We also introduce and explain the “general” quantitative
techniques that are used in risk quantification.
We then turn to look in more detail at how the individual types of market risk are measured and
managed. We explain and demonstrate how equity risk is measured at the single instrument and
portfolio levels and how these risks can be mitigated using futures, options and swaps. Further, we
explain how interest rate risk is measured using the duration concept, and we explain and
demonstrate how general interest rate risk, yield curve risk and spread risk can be hedged using
interest rate derivatives. We also explain and demonstrate how FX and commodity risk can be
measured and managed.
After looking at the individual risk types, we introduce the important, aggregate risk measure
“ValueatRisk” (VaR). We explain how VaR is calculated for various risk types. We discuss the
strengths and weaknesses of VaR and we point out the pitfalls of using VaR in isolation. We also
explain how “stress testing” can and should be used to complement VaR measures.
Finally, we give you a thorough review of the regulatory treatment of market risk under the Basel
rules. We explain and demonstrate how the “pillar 1” capital charges are calculated. We also
explain how market risks are treated under “pillar 2”, and we discuss the internal and external
reporting requirements.
Day One
09.00  09.15 Welcome and Introduction
09.15  12.00 Introduction to Market Risk Management

Why Market Risk Has Become More Important – Again
 Globalization and integration of markets
 Increased volatility
 Tougher regulation/Increased capital charges
 Overview of Types of Market Risks
 Best Practices in Market Risk Management
 The Risk Management Triangle: Identification, Measurement and Management

Market Risk Management Functions in a Bank
 Control, Supervision and Limit Setting
 Valuation (Mark to market) and P/L Monitoring
 Risk Measurement and Board Reporting
 Basel Capital Requirements for Market Risk – Overview
Quantitative Tools for Market Risk Measurement
 The Components of Market Risk
 Measuring Return and Volatility
 Probability, Loss Distributions, Arbitrage Models
 Exercises
12.00  13.00 Lunch
13.00  16.30 Measuring and Managing Equity Risk
 Drivers of Equity Risk
 Macroeconomic Factor Models
 Systematic and Unsystematic risk
 Measuring Systematic Risk (Beta)

Risk Pricing
 The Capital Asset Pricing Model (CAPM)
 The international CAPM
 The equity premium puzzle

Managing Equity Risk with Derivates
 Equity derivatives – market overview
 Altering portfolio beta with index futures
 Hedging equity portfolios with equity options
 Hedging with equity swaps
 Case Studies
 Exercises
Day Two
09.00  09.15 Recap
09.15  12.00 Measuring and Managing Interest Rate Risk
 Price and Yield Analysis
 Duration Analysis, BPV and Convexity

Interest Rate Volatility
 Price and Yield Volatility
 Leverage and Interest Rate Risk

Measuring Yield Curve Risk
 “Bucketing”
 Key rate duration
 Principal components analysis
 Prepayment and Option Embedded Risks
 Measuring Interest Rate Risk at the Portfolio Level

Managing Interest Rate Risk with Derivatives
 Interest rate derivatives – market overview
 Altering portfolio duration with bond futures
 Hedging interest rate risk with swaps
 Case Studies and Exercises
12.00  13.00 Lunch
13.00  16.30 Measuring and Managing FX Risk
 Key Determinants of FX Volatility

Measuring FX Exposure
 Economic exposure, translation exposure and transaction exposure
 FX Volatility and SinglePosition Risk
 FX Portfolio Risk

Managing FX Risk with Forwards, Swaps and Options
 Hedging principal value vs. total economic Risk
 Case Study and Exercise
Measuring and Managing Commodity Risk
 Types of Commodities and their Risks
 Volatility and Correlation of Commodity Returns
 Hedging Commodity Risk with Commodity Derivatives
 Case Study and Exercise
Day Three
09.00  09.15 Recap
09.15  12.00 Portfolio Market Risk
 Portfolio Effects and Diversification
 Correlation and Covariance Analysis
 Composite and Portfolio Risk Measures
Value at Risk and Stress Testing
 What is “ValueatRisk”?
 Uses of VaR in Risk Management

Ways of Measuring VaR
 Parametric and nonparametric VaR
 Historical simulation
 Monte Carlo simulation
 Calculating VaR for Linear Exposures
 Calculating VaR for Nonlinear Instruments

Stress Testing
 Why stress testing?
 Main uses of stress testing
 Scenario analysis
 Mechanical approaches
 Case Study and Exercise
12.00  13.00 Lunch
13.00  16.30 Regulatory Treatment of Market Risk
 The Risk Measurement Framework

The Standardized Measurement Method
 Interest rate risk
 Equity position risk
 Foreign exchange risk
 Commodities risk
 Treatment of options

The Internal Models Approach
 Qualitative and quantitative standards
 Specification of market risk factors
 Stress testing
 External validation
 Revised Rules for Treatment of Counterparty Risk (Basel III)
 Regulatory Reporting (Pillar II + III)
 Internal Reporting and Control (limits etc.)
Summary, Evaluation and Termination of the Seminar
