Day 2

• Market factors: The main source of market risk, price variability/volatility, trends, gains and losses. Characteristics of markets and dynamics
• Dispersion, skew and tail risks
• Principal Component Analysis (PCA)
• Market participants, speculators, hedgers and arbitrageurs
• Marking to market with pricing models, dealing with illiquidity, position size and concentration. Valuation and transparency issues.
• Marking to market with pricing models
• Dealing with illiquidity, transaction costs and position sizes

Calculation of market values for fixed income instruments based on Discounted Cash Flow (DCF) models and real-life market data

• Calculating factor sensitivities for
  • foreign exchange (FX or FOREX)
  • equities
  • bonds
  • swaps
  • options and other non- linear derivatives

Calculation of factor sensitivities. Example of managing a swap portfolio using factor sensitivity, duration and DV01matching

• Overview of the Monte Carlo simulation techniques
• Cholesky decomposition, covariance matrices and factorisation

Performing Cholesky decomposition on covariance matrix and using it for MC risk simulation of a derivatives portfolio

• Factor sensitivity: Limits of the approach
• VaR using variance/covariance method
• VaR using historic simulation
• VaR using Monte Carlo simulation

• Value- at- Risk limits
• Specific risk for equity and debt instruments

• Conditional VaR (CVAR or Expected Shortfall)
• Risks Not in VaR
• Which risks are modelable and which are not?

Conditional VaR (Expected Shortfall) estimation

Component VaR, Stress Testing - design and usage

• Capital based on VaR and ES methodologies and the relationship to Basel Standard Rules
• Risk model validation and Back-testing

• Natural hedges
• Linear hedges
• Nonlinear hedges
• Calculation of Deltas and foundations of Delta hedging
• The other greeks: Gamma, Theta & Co.

Delta Hedging of Equity Derivative portfolios in MS Excel