75447 - Advanced Methods of Risk Management 1

Learning outcomes

At the end of the course the student is familiar with the main principles and tools of market risk analysis and the hedging techniques. He knows the general theory of risk measures and the principles of market risk regulation. He is able to design a process of market risk measurement and reporting, and to make market risk management decisions.

Course contents

1. Market risk and the definitions of "price", "risk factor" and "sensitivity"

2. Risk factors and risk mapping for linear, non linear and structured products.

3. Risk measures: VaR and ES in the axiomatic approach

4. Spread risk single name: bond and CDS spreads

5. Spread risk multi name: credit risk portfolios and securitizations

6. Correlation risk and copula functions

7. Counter party risk and credit valuation adjustments

8. Counterparty risk mitigation and funding valuations adjustments

9. Market risk. liquidity and accounting: valuation risk

10. Overview of market risk regulation: towards FRTB

Readings/Bibliography

1. C. Acerbi, Coherent Representations of Subjective Risk Aversion, ch. 10 in G. Szego (ed), Risk Measures for the 21th Century, Wiley Finance Series, 2004
2. M. Bianchetti and U. Cherubini, Prudent Valuation Guidelines and Sound Practices, https://ssrn.com/abstract=2790629 , 2016
3. U. Cherubini and G. Della Lunga, Structured Finance: The Objected Oriented Approach, Wiley Finance, Chichester, 2007
4. J. Mina and J. Y. Xiao, Return to RiskMetrics: The Evolution of the Standard,RiskMetrics, New York, 2001
5. JP Morgan, RiskMetrics™ – Technical Document, Fourth Edition, New York, 1996

Additional reading will be provided during the course

Teaching methods

Classroom lectures

Assessment methods

The exam will be based on:

1. a term paper or portfolio analysis
2. an oral examination in which the student will discuss the term paper or portfolio and then will answer questions about the subjects covered in the whole program.

The term paper or portfolio analysis will account for up to 5 points in the final grade.

If the term paper is chosen, it should consist of

1. an introduction to the problem or topic chosen
2. a review of the literature on the subject
3. a mathematical treatment of the problem
4. an illustrative example with data, either real or simulated

If the portfolio is chosen, it should consist of:

1. a description of the portfolio that should consist of a linear part (stocks, bonds and currency) and a structured product
2. valuation of the portfolio (possibly considering risk factors and liquidity issues)
   
3. the capital requirement computed according to the standardized approach of FRTB, based on valuation and sensitivities
4. your own computation of the capital requirement.

Teaching tools

Portfolio case study. Computer exercises.

Office hours

See the website of Umberto Cherubini