Financial Risk Management (P01815)

? Credit Points : 10 ? SCQF Level : 11 ? Acronym : MAT-P-FRM

Typically a bank decomposes its business risk into credit, market, operational, interest rate risk and strategic risk. Each major risk is then subdivided into more detailed categorizations of risk. This course will present a parameteric model-based approach to these risks
and show how these can be used to diversify risk. The course is practically oriented with many illustrations and computing labs sessions where the students develop examples of financel risk models.

Introduction: Analysis of risks in the banking sector, Financial engineering, the parameteric model-based approach, correlations and diversification of risk.

Basel II: capital adequacy based on mathematical models, Interest risk and ALM (Asset and Liability Management).

Market Risk: Value at Risk models (Historical simulation, Monte Carlo simulation, Risk Metrics, Markowitz mean-variance, the Sharpe ratio (i.e. CAPM model), conditional VAR), Portfolio hedging (Option pricing
models, Trading systems, Delta, Gamma and other types of hedging).

Credit risk: Rating/Pricing models, The notions of expected and unexpected losses, Credit risk modelling.

Operational risk: The nature of qualitative risks, The method of loss distribution, The scorecard approach.

Model risk: Danger of applying models in inapropriate situations.

Stress testing: Extreme event theory and simulating rare and
catastrophic events.

Conclusions: Towards integrated risk management.