by ·Comments Off on Asset Liability Management – Crash Course

Course Details

Price

  • Non Print version – $27.99
  • Print version – $29.99
  • EXCEL Example – $19.99

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Course Title

Buy Print or Non Print Version
Asset Liability Management – Crash Course
Asset Liability Management – Crash Course – EXCEL Examples

Course Contents

1. Introduction
2.Duration and Convexity
3. Value at Risk (VaR)

  • Variance Covariance Approach
  • Historical Simulation Method

4. ALM Risk Measurement Tools

  • Fall in Market Value of Equity
  • Earnings at Risk
  • Cost to Close
  • Rate Sensitive Gap
  • Price Sensitive Gap
  • Liquidity Gap
  • Net Interest Income (NII) at Risk
  • Duration Gap Analysis

5. Applications

  • Bank
  • Duration matching/ immunization
  • Pension Funds and Insurance
  • Portfolio dedication

6. Other Liquidity Risk Measurement Tools

  • Setting limits for liquidity risk
  • Cash flow mismatch or gap limits
  • Maturity Limits
  • Target Liquid Reserves
  • Concentration Limits
  • Contingent liability limit
  • Review
  • Exception handling
  • Contingency Funding Plan
  • General requirements for a liquidity contingency plan
  • Specific requirements for a liquidity contingency plan
  • Liquidity enhancement tactics
  • For Systemic crisis
  • For company specific crisis

7. Liquidity Management

  • Liquidity Ratios and Analysis
  • Current Ratio
  • Quick Ratio
  • Unused lines of credit
  • Borrowing/ Debt-to-Equity Ratio
  • Net Working Capital Ratio
  • Loan-to-Deposit Ratio
  • Loan- to- Asset Ratio

Number of pages

40

File Size

1.41 MB

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Asset Liability Management – The ALM Crash course

by ·Comments Off on Calculating Value at Risk

Course Details

Price

  • Non Print version – $4.99
  • Print version – $7.99
  • EXCEL Example – $9.79

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Course Title

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Calculating Value at Risk Includes case study
Calculating Value at Risk EXCEL Example

Course Contents

1. Introduction
2. VaR Methods

    a. Variance Covariance Approach
    b. Historical Simulation Method
    c. Monte Carlo Simulation
    d. Quick Review
    e. Implementing VaR

3. Methodology

    a.  Setting the Scene
    b.  Preliminary steps
    c.  VaR Approach Specific Steps
    d.  Scaling of the daily VaR

4. Caveats, Qualifications, Limitations and Issues
5. Case Study – Risk for the Oil and Petrochemical Industry

    a. A Framework for Risk Management
    b. Risk Policy
    c. Good Data and a First Look at Models
    d. Models and Tools
    e. Metrics and Sensitivities
    f. Limits and Control Process
    g. Conclusion

Number of pages

30

File Size

1.5 MB

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Master Class: Calculating Value at Risk (VaR): Introduction

by ·Comments Off on New Course on Risk Management within the Oil, Gas and Petrochemical Industry

Over at the Learning Corporate Finance Blog, I posted a new free online course on risk management within the Oil, Gas and Petrochemical.

A short six session introduction to a risk management framework for the Oil, Gas and Petrochemical industry focused on managing crude oil price volatility for Oil refiners, Polymer and PVC manufacturers and Power Plant operators with partial fixed price tariffs and no government subsidies. While the course builds up from basic discussion on policy, data and models, it also introduces the concept of margin shortfall analysis as a tool for tracking, managing and hedging volatility in crude oil prices.

 

Master Class: A Risk framework for Crude Oil and Petrochemical industry: Short Course: Session I

 

Master Class: A Risk framework for Crude Oil and Petrochemical industry: Risk Policy: Session II

 

Master Class: A Risk framework for Crude Oil and Petrochemical industry: Data and Models: Session III

 

Master Class: A Risk framework for Crude Oil and Petrochemical industry: Models and Tools: Session IV

 

Master Class: A Risk framework for Crude Oil and Petrochemical industry: Limits and control process: Session VI

 

 

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Scheduled for 18th March 2010 at the Dusit Thani in Dubai.

by ·Comments Off on Understanding Commodities Risk – in print March 2010

Understanding Commodities Risk – out in print early March 2010


The principles are simple. Document the supply and demand of a resource, the psychology of its market and participant behaviour and you should have a handle on how prices move. Identify any leading indicators and your price prediction model is complete.

Interesting enough while commodities markets are older than time, at the user level price movement in this group is not as well understood as stocks and bonds. While each commodity is unique and to some extent interlinked with broader trends in oil, gold and currencies, analyst coverage is not as common or as deep as we would want. Till about two years ago this was acceptable since markets would spike and prices would shoot on account of supply and demand pressures and when an aggressive player was trapped in a short squeeze in a given market at a time. But all of this changed with the arrival of 2008, with 147 dollar oil, 1200 dollar gold, correlations and volatilities that could downshift before you could even spell the word sell.

In this edition of commodity risk, we have tried to answer five specific questions

  1. What are the relevant and credible drivers behind price movement of oil?
  2. What is the relationship between Australian dollar and gold?
  3. How have correlations and volatilities changed between 2008 and 2009?
  4. What is the real rate of interest in the Indo-Pakistan subcontinent? How closely are these two markets linked?
  5. How are price movements in oil related to other commodity groups? How does this analysis extent to Palm oil?

 

We start with a look at Oil, Gold, Natural Gas, Interest Rates and the Australian dollar. We look at the dynamics and the drivers behind these five groups and the one currency that is looked at as a leading indicator both for price movements and correlation. To this mix we add edible oil (Palm oil), inflation and interest rates in the region as well as examine the changing trend in correlations. Interest rates, real rates and inflation allowed us to examine inflation hedge effectiveness as well as document inflation adjusted returns.

by ·Comments Off on The Hierarchy of Treasury Limits

For monitoring market risk, the company will need to segment the overall investment portfolio. They may for instance segment the portfolio by product, then trading desk, then trades. For each segment of the portfolio limits will be defined. Generally, limits increase as you move up in the hierarchy. For example market risk hierarchy may be established as depicted below. A risk metric is selected (duration, VaR, etc) and risk limits are specified for each component of the hierarchy based on this metric.

Exceptions

When the stop loss limit is breached the investment will be liquidated as soon as possible. Any exception to this process should be approved at the right authority level within the risk management division. This exception approval hierarchy will generally be based on absolute dollar/dirham amount of loss that can be booked on a position before it should be cut, and will be suggested by the risk management group and approved by the Board Risk Committee.

by ·Comments Off on Product and counterparty limits – what is at risk?

For instruments that trade and are re-priced on a daily basis we need to consider the interaction of credit risk (a counterparty default) and price risk (the risk that the market has moved against us).

What happens when a counter party defaults on settlement when

  1. He has to deliver a bond that you have purchased and
    1. bond prices have moved downwards
    2. bond prices have moved upwards

       

  2. He has to take delivery of a bond that you have sold and
    1. bond prices have moved downwards
    2. bond prices have moved upwards

     

  3. Do we have the same exposure on a derivative contract? Interest Rate Swaps and Cross Currency Swaps
  4. He has to deliver Euros that we have purchased and
    1. US$/Euro Exchange rate has appreciated in favor of Euro
    2. US$/Euro Exchange rate has appreciated in favor of US$

     

  5. Do we have the same exposure on option contract?

     

  6. How do we calculate Potential Future Exposure?

Counterparty Limits – Measuring Exposure

Counterparty limit setting process can be broken down into two categories.

The first is the Financial Institution (FI) limit setting process which is dealt with through the FI function.

The second is a customer limit which is treated and calculated in the same manner as allocation of credit to corporate customers.

The FI limit setting process entails setting limits depending on:

  • Issuer’s credit rating (limits set on issuer based on credit rating)
  • Analysis of its financial health and strength, including capital adequacy, asset quality, earnings/ profitability, liquidity position, cash flow generation capacity, liquidity, ratios (limits set based on acceptable levels for financial ratios).
  • Institution profiles, such as the history, nature of business, types of business, product offerings, branch network and compliance with KYC (limits set based on acceptable benchmarks for each characteristic)

The FI limit setting process may also be product specific.

For a corporate customer, especially on derivative contracts, the primary question on a given transaction is Potential Future Exposure. How much money can the bank lose if the customer defaults on settlement? And is there anything the bank can do to secure that exposure?

by ·Comments Off on Operational and additional Transactional limits

Besides stop loss limits discussed above the following limits should also be set:

Inventory age limits

Inventory age limits set the time for which any security is held without being sold. This is to prevent traders from sitting on illiquid positions or positions with an unrecognized loss. The time allowed will depend on the overall purpose of the desk. If the desk is expected to trade in and out of the position quickly, the limits will be on the order of days. If the desk is expected to use long-term strategies then the limit can be on the order of weeks or months.

Concentration limits

Concentration limits prevent traders from putting all the eggs in one basket. They ensure that the traders risk is not concentrated in one instrument or market. For example the equity desk may be limited to a maximum of 3% in any one company. This may also be subject to a limit on total percentage of that company’s equity that may be held.

by ·Comments Off on Loss Capital and Stop Loss Limits

Capital Loss & Stop loss limits

Stop loss limits act as a safety valve in case something starts to go wrong. Stop loss limits state that specified action must take place if the loss exceeds a threshold amount. Tight stop loss limits reduce the maximum possible loss and therefore reduce the capital required for the business. However, if the limits are too tight they reduce the trader’s ability to make a profit.

The first step in setting stop loss limits is to determine the appetite of the company regarding its risk tolerance. This translates to specifying the amount of capital that the company can afford to lose.

The following elements would need to be considered when determining the capital loss amount.

  • The expected rate of return that will be earned on the capital will the next twelve month period.
  • The rate of return that will be required to satisfy shareholders.

by ·Comments Off on Risk Limit Management Philosophy

Basic Principles of Limit Setting

From the book “The Fundamentals of Risk Measurement” by Chris Marrison

  • Ideally limits should be risk based, i.e. the measurement of limit utilization should be directly proportional to the amount of risk taken.
  • Limits should be fungible at lower levels. The trader should be allowed to take risks to exploit the best opportunities available without being too tightly bound by complex limit system. Similarly a senior trader should be allowed to move limits from one subordinate desk to another.
  • The limits should be aligned to the company’s competitive advantages.
  • If a portfolio is to be managed within a given set of limits, it should not be possible for changes in another portfolio to cause the limits for the former portfolio to be broken.
  • Both hard and soft limits need to be set. If the limit is hard then traders know that they will be disciplined or fired for violating the limit. If the limit is soft a violation simply leads to a conversation when the trader is advised to reduce the position.