Derivative Risk Management for Corporates

Course Objectives

The overall goal of this two-day workshop is to enhance participant understanding of derivatives transactions so they can recognise both their benefits and risks for corporate clients and potential risks and mitigants for the Bank itself.

Specifically, participants will be equipped to:

• Use a structured approach to anticipate client risk management needs and identify appropriate derivative product solutions
• Recognise the accounting, cash flow and credit implications of derivative products for their clients
• Understand the various types of counterparty credit risk occurring in derivative products, the key drivers of these risks for the main product types and potential mitigants.

Target Audience

This workshop is designed for relationship managers, sales and other individuals in client-facing roles that involve the identification and marketing of derivatives. It is expected that participants will have a basic knowledge of derivative products, although the course will refresh this knowledge. This workshop can serve as a preparation for the more advanced workshop: Counterparty Credit Risk in Derivatives, which focuses more on the risks for the Bank. Another complementary workshop is Derivatives and corporate credit, which focuses on the accounting, financial and credit impact of derivatives on corporates.

Content

ANALYTIC APPROACH TO BUSINESS DEVELOPMENT

The goal of this section is to provide a structured approach to identifying client risk management needs; accounting and credit risk implications will also be addressed.

Structured approach

• Using the business cycle and financial statements to uncover operational and financial risk management needs:
  • Business risks: operating and investment flows
  • Financial risks: funding flows.
• Risk management challenges:
  • Interest rates, foreign exchange, equity, credit, inflation and commodity
  • Where do they arise in the financial statements?

Hedging strategies

• Criteria that drive decision making:
  • Perceived magnitude and probability of the risk: risk appetite
  • Identifying "natural" offsets in the business: economic and transactional
  • Credit impact of hedging versus open exposures.
• Derivatives strategies: hedging, trading, dynamic hedging
• Potential product solutions: cost and management systems needed to support their choice.

RISK MANAGEMENT SOLUTIONS: MATCHING PRODUCTS TO CLIENT NEEDS

The goal of this section is to ensure that participants understand the key differentiating features of the main product types and how to identify most appropriate product solutions to meet client needs.

This section will be taught using a series of short exercises and examples built around "client scenarios" which the participants will be asked to work on individually and / or in small groups.

Interest rate risk

• Identifying and quantifying risk management needs for debt funding, liquid assets and economic exposures
• Sample client scenario: a company with both economic and transaction exposure to rising interest rates
• Product solutions: structure and pricing differences between forward rate agreements (FRAs), interest rate swaps and options (caps and floors).

Currency risk

• Identifying and quantifying risk management needs for sales, costs of sales, overseas subsidiaries and affiliates
• Sample client scenario: a company with raw material costs priced in a different currency facing competitors in its export markets who have no currency risks
• Product solutions: structure and pricing differences between: FX forwards, cross currency swaps, and FX options.

Commodity risk

• Identifying and quantifying risk management needs for commodity exposures in both revenues and costs
• Sample client scenario: an airline with high fuel costs
• Product solutions: forwards, swaps and options.

FINANCIAL STATEMENT ANALYSIS

The goal of this section is to understand how derivatives are accounted for under IFRS, and to evaluate the resulting impact on financial statements including the extent and usefulness of the disclosure.

Statement logic

• Basics of accounting for derivative products: fair valuation, IAS 39
• Where derivatives are reflected on the balance sheet
• Hedge accounting overview:
• Fair value, cash-flow, and foreign currency hedges of overseas operations
• Hard cases: firm commitments, ineffective hedges, embedded derivatives
• Key disclosure requirements: what information is useful in identifying future risk?

COUNTERPARTY RISK

The goal of this section is to identify and understand the counterparty risks faced by banks in derivatives transactions with their corporate clients and ways in which they can be mitigated.

Overview of credit risk

• Differentiating derivative credit risk from other forms of credit risk
• Different categories of derivative credit risk with a focus on pre settlement and settlement risk.

Drivers of transaction risk

• Structured approach to assessing and quantifying risk
• Product structures and cash flows
• Quick and dirty estimation of pre-settlement risk
• Sample transactions: FX forward, interest rate swap.

Structuring transactions

• Key documents: ISDA and credit support annex (CSA)
• Credit mitigation techniques e.g. netting, collateral.

CLOSING CASE STUDY

The goal of this case study is to apply the structured approach to the analysis of the client exposure.

• Identify risk management needs for the client and match with appropriate product solutions
• Assess the accounting and credit implications of the transaction for the client
• Evaluate the risk for the bank and recommend appropriate transaction safeguards.

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.