ACF Academy : : Risk Management : : Credit Exposure of Derivatives

Category: Risk Management

This two-day programme focuses on the potential losses arising from derivatives portfolios exposed to credit and counterparty risk. The programme will blend instructor-led training sessions with practical hands-on workshops and mini-cases using pricing tools, and risk analysis, and simulation. A central part of the programme will be an in-depth case study based on banks' own experiences. The principal objectives of this intensive two-day seminar are to:

	Develop a solid conceptual understanding of the methods used to estimate credit exposure on derivative transactions
	Review and explain the characteristics of credit risk arising from swaps and other derivative products
	Provide an intuitive awareness of the level and magnitude of credit risks – not the mathematical minutiae, but a sense of what looks right and what demands further analysis
	Analyse the credit exposure from exotic and more complex derivative transactions
	Consolidate understanding by providing practical examples illustrating each of the concepts covered

Managing credit risk during the credit crisis.



Measuring and Managing Risk

	Measuring market risk
	Identifying overt and covert risks
	The VaR principle applied to market risk
	Dollar Earnings at Risk (DEaR)
	The portfolio approach
	Links between:
	Credit risk and market risk
	Liquidity risk and other risks
	Managing risk
	Brief review of collateral and collateral management
	Brief review of operational risk
	Settlement risk, netting, and DVP
	Legal risk and legal Issues
	Structuring to reduce risk

Calculating Credit Exposure – Part 1

	Components of credit exposure: monetary risk and event probability
	Financial exposure from derivatives
	Average vs. peak exposures
	Modelling session using a credit risk pricing system

Review of Swaps and Swap Credit Risks

	Interest rate, currency, and equity swaps
	Swap cash flows
	Principles of swap pricing and valuation
	Credit risk of swaps

Major Case Study

In this important section of the program, delegates will be split into small teams and be given dossiers summarising proposed transactions for a small number of clients. The task for each team will be to identify and assess the credit risk, to consider and prepare recommendations, and then to present these recommendations formally. During the session, delegates will be able to use a credit risk pricing system to assess the impact of credit risk. At the end, the instructors will debrief the analysis, and present their own assessments. The case study will therefore comprise:

	Identifying and quantifying the credit risk
	Preparing recommendations
	Presentations of recommendations
	Debriefing



Calculating Credit Exposure – Part 2

	Drivers of exposure
	Potential vs. actual credit exposure
	Impact of market risk on credit exposure
	Relatedness vs. unrelatedness
	What do the numbers actually mean?
	Calculating credit risk from distributions of probability and LGD

Pricing Credit Risk

	Overview of credit default swaps (CDS)
	Obtaining default probabilities and recovery rates from CDS
	How to price credit risk using CDS
	Calculating the cost of credit risk

Credit Derivatives

	Types of credit derivative
	Credit events
	Using credit derivative swaps
	The credit risk of credit derivatives

Major Case Study

	Credit risk in exotic and complex transactions
	What makes an exotic transaction exotic?
	Credit and liquidity risk implications for exotics
	Exotic options
	Structured products
	Examples of exotic transactions
	Assessing credit risk for an exotic derivative

NB All practical sessions are highlighted like this:
	means a Workshop or Simulation
	means a Case study