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Fundamentals of Derivatives Risk

A two-day workshop giving a practical insight into the risks involved for traders, investors and risk managers using different types of derivatives. The workshop is based around practical examples and case studies which illustrate market, counterparty, liquidity, operational and reputation risks.

Course Objectives

The aim of this two-day workshop is to give participants an overview of the different risks encountered in derivatives transactions, how they inter-relate and how they can be measured and monitored.

Specifically, participants will be equipped to:

  • Understand how risks in derivatives transactions differ from traditional banking products and why special care needs to be taken in measuring and monitoring these risks
  • Distinguish market, credit, operational, liquidity and reputation risk in derivatives products and understand how they inter-relate.
  • Identify the different types of exposure within each risk group and derivative type and review how these exposures can be measured.
  • Review lessons learned from risk management failures in derivatives transactions in order to establish best practice in the monitoring and mitigation of risks.

Target Audience

A foundation level risk focused workshop for capital markets, risk, credit analysts, origination, corporate and bank treasurers, investment management and regulatory professionals who need a better understanding of the practical day to day risks involved in different types of derivatives. The risk focus of the workshop makes it complementary to product skills learned elsewhere. This workshop can serve as a preparation for the intermediate to advanced level: Counterparty Credit Risk in Derivatives which focuses in detail on best practice in the measurement and management of counterparty credit risk.

Content

DERIVATIVE PRODUCT OVERVIEW

The aim of this section is to review the key features and risk profiles of different types of derivatives transactions.

Key features of derivatives
  • Market dynamics: history, size and development of derivatives markets
  • Derivatives building blocks: forwards, futures, swaps and options; simple and compound structures
  • Exercise: review of main features of key derivative products e.g. interest rate swap, FX forward and credit default swap
  • Markets: interest rate, foreign exchange, credit, equity, commodity and exotic products
  • Settlement and clearing mechanisms: exchange traded versus over the counter; role of central clearing parties.
ANALYTIC OVERVIEW
Derivatives risk
  • Key features of derivative transactions and how the risks differ from other banking transactions
  • Purpose of derivatives transactions: hedging, trading, investing
  • Risk perspectives of different types of parties: banks, companies, public sector entities, pensions and other investment funds
  • Exercise: how and why different counterparties use derivatives.
Risk management
  • Identifying and defining major risk groups and how they arise in the derivatives business: market, credit, liquidity, operational and reputation
  • Lessons learned from risk management failures in derivatives
  • Exercise: Company failures caused by derivatives.
MARKET RISK

This segment reviews how market risk arises in derivatives and how this can be measured and controlled.

Types of market risk
  • Types of market risk in derivatives: position (net long or short), relative (basis, spread, correlation), optionality, complexity
  • Trading book vs banking book derivatives risk.
Measuring and managing the risk
  • Differing methods of measuring and monitoring derivatives: how and where they are used, benefits and shortcomings of each
  • Value at Risk (VaR): definition and key concepts: holding periods, confidence levels and disclosure, backtesting
  • Exercise: Calculating VaR on a simple derivative transaction
  • Greeks: uses of delta, gamma, vega and theta to measure risk in the dealing room
  • Limit structures in the dealing room
  • Stress testing, scenario testing and simulation modelling.
Case study:

Measuring market risk.

CREDIT / COUNTERPARTY RISK

This segment reviews the main types of counterparty risk in derivatives and how they are measured and mitigated. Derivatives from the main product groups (interest rate and foreign exchange) will be used as examples.

Types of counterparty risk
  • Differentiating derivative credit risk from other forms of credit risk
  • Different types of counterparty risk: pre-settlement and settlement and other risks.
Case study:

Failure due to poorly managed counterparty risk.

Measuring and mitigating the risk
  • Challenges of predicting exposure at default
  • Exercise: Compare pre-settlement risk on two transactions e.g. an interest rate swap and FX forward
  • Basics of credit mitigation techniques and documentation.
LIQUIDITY, OPERATIONAL AND REPUTATION RISK

This segment reviews how liquidity, operational and reputation risk arise in derivatives and how these risks can be measured and controlled.

Types of risks
  • Transactional liquidity risk in derivatives: secondary market, contingent outflows from collateralisation
  • Reputation risk: ensuring derivative transactions are appropriate for the client
  • Case study: examples of transactions inappropriate for the specific counterparty
  • Operational risk: key challenges with derivative risk models and mitigation techniques.
Case study:

Banks and companies who failed due to fraud, poor systems, procedures and other operational risk failures.

Managing the risks
  • Lessons learned from risk management failures
  • Best practice in managing liquidity, operational and reputation risk within banks
  • Regulatory requirements and impact of moves to central counterparties.
Case study:

Failure of a major insurance company.

Workshop Times

Below are typical timings for our courses; upon registration we shall advise you if these have changed.

Breakfast: 8.30am
Course Start: 9.00am
Course End: Between 5.00pm and 5.30pm
Lunch starts between 12.30pm and 1.00pm, and lasts no longer than 1 hour.
Short breaks of 10 - 15 minutes are taken mid morning and mid afternoon.

Please make your course selection
London - £1,850 + 20% VAT
21 - 22 June, 12
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29 - 30 November, 12
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New York - US$2,800
11 - 12 October, 12
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The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience on the course page for more details.

For any other course or registration related questions please visit our FAQ page or contact us on enquiry@fitchtraining.com
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NASBA

The majority of Fitch Training programmes are offered at an intermediate and advanced level. There are no specific prerequisite courses to attend our programmes, however some topic knowledge maybe required. Please refer to the target audience to see what level of prior knowledge is required for a specific course.

The pre-course reading materials will be sent to each participant in preparation for their attendance on the course.

Client Comments
"Very positive and interesting."
- A. Tedesco
- Sumitomo Mitsui Banking Corporation