The purpose of this seminar is to give you a good and practical understanding of advanced quantitative risk measurement methods.
We start with a review of developments within modern risk analysis and explain why risk measurement has become more important and challenging in a post-Basel III and low-interest rate environment.
We then give a thorough explanation of how "Value-at-Risk" (VaR) and "Stressed VaR" can be calculated for linear and non-linear exposures. We explain the use of delta-normal and delta-gamma-normal methods for the calculation of VaR for forwards, swaps and options. We discuss the shortcomings of VaR and introduce "Expected Shortfall (ES)" as a better (more coherent) risk measure. We show how ES is calculated, how ES expectedly will translate into capital charges, and how ES and other risk measures are used in practical trading book risk management. We also discuss the practical difficulties in back testing ES model and suggest possible solutions to these problems.
We introduce Extreme Value Theory and explain and demonstrate its applications in finance. We present the two main approaches to estimating tail distributions: the "Block Maxima" and the "Peaks over Threshold" groups of models. We demonstrate how a "Generalized Pareto Distribution" can be fitted to real-life financial data, and we visualize results using graphical tools. We also explain and demonstrate how EVT can be used in financial risk management. We use extreme value theory to calculate conditional and non-conditional VaR and Expected Shortfall, and we discuss the use of EVT in "Stress Testing and in asset allocation.
Further, and we explain and demonstrate the use numerical techniques (including historical simulation and Monte Carlo simulation and principal components analysis) for pricing and risk analysis of complex instruments and portfolios.
Finally, we explain and demonstrate how credit spread risk (credit migration risk), counterparty risk and CVA risk can be measured and managed comprehensively.