Course Overview

Conventional Sources of Market Risks

• Equity
• Currency
• Interest Rates
• Commodity
• Real Estate
• Asset Bubbles

Impact of Market Risk on Banks and Financial Institutions

• Sourcing of liquidity risk
• Asset bubble bursts (value of own investments and loan collaterals)
• Credit risk/Loan default due to asset value losses
• Losses on speculative trade/asset positions
• Insolvency due to large losses
• Credibility risk (due to rogue trading)

Market Risk Assessment Models

• Interest gap analysis
• Yield curve and interest margin on banking book
• Value at Risk (VaR)
• Asset positions/concentrations
• Income/profit composition (banking book and trading book)

Market Risk Management Systems

• Regulations: Maximum limits on positions (equity and forex), haircuts on collaterals (for provisioning), Volker Rule (restrictions on proprietary trading for US banks), loan-to-value ratios (limiting exposure to asset value), capital charge (risk-weighting and minimum capital – Basel III) and prohibition of insider dealings and market manipulations
• Financial accounting: Financial Instruments – Measurement and Recognition (IFRS 9)
• Portfolio diversification strategies
• Front Office, Middle Office and Back Office arrangement for securities trading
• Limits on bank positions and dealer positions
• Internal controls (preventing fraud and breaches)
• Hedging through Derivatives (swaps, futures, options)
• Governance: Integrated risk management committee and MIS