Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Securitization wikipedia , lookup
Financialization wikipedia , lookup
Beta (finance) wikipedia , lookup
Moral hazard wikipedia , lookup
Business valuation wikipedia , lookup
Greeks (finance) wikipedia , lookup
Investment fund wikipedia , lookup
Investment management wikipedia , lookup
RM functions Zvi Wiener 02-588-3049 http://pluto.mscc.huji.ac.il/~mswiener/zvi.html FRM-3 Structuring RM functions • Set firm-wide policies • Develop methodology • Set RM structure • Risk communication Zvi Wiener FRM-3 slide 2 Active Risk Management Allocate capital Stress Market, Credit VaR Monitor Identify and avoid Zvi Wiener RAROC Risk Analysis Limit Management FRM-3 slide 3 RAROC • Risk Adjusted Rate of Return • Performance measurement • Marginal impact of any new transaction • Consistent pricing Zvi Wiener FRM-3 slide 4 New Approach Three pillars A. Minimum Capital Requirement B. Supervisory Review Process C. Market Discipline Requirements Zvi Wiener FRM-3 slide 5 Goals and Instruments • Risk Tolerance - “worst loss” • Stop losses • Capital allocation • Credit risk policy • Operational risk policy Zvi Wiener FRM-3 slide 6 Risk Measurement • Consistent market based method • Old limits duration, ALM • VaR + Stress • Backtesting Zvi Wiener FRM-3 slide 7 Systems • Data bases market position rules • Risk measuring tool • Reports and decision support Zvi Wiener FRM-3 slide 8 IT - Information Technology • Unifying information from various units • Unifying information from various markets • Unifying information for various ownership • Back office and execution control Zvi Wiener FRM-3 slide 9 Organizational structure • Front office • Middle office • Back office Zvi Wiener FRM-3 slide 10 Front office • execution • risk taking • marketing Zvi Wiener FRM-3 slide 11 Middle office • risk management • pricing • economic forecasts Zvi Wiener FRM-3 slide 12 Back office • verification • booking • reporting • collection • settlement Zvi Wiener FRM-3 slide 13 ALCO • Assets Liability management committee • responsible for establishing documenting enforcing all policies involving market risk • FX • liquidity • interest rate Zvi Wiener FRM-3 slide 14 Interdependence of RM Senior Management Trading Room Risk Management Operations Finance Zvi Wiener FRM-3 slide 15 Senior management • Approves business plan and targets • Sets risk tolerance • Establishes policy • Ensures performance Zvi Wiener FRM-3 slide 16 Trading Room Management • Establishes and manages risk exposure • Ensures timely and accurate deal capture • Signs off on official P&L Zvi Wiener FRM-3 slide 17 Operations • Books and settles the trades • Reconciles front and back office positions • Prepares and decomposes daily P&L • Provides independent MTM • Supports business needs Zvi Wiener FRM-3 slide 18 Finance • Develops valuation and finance policy • Ensures integrity of P&L • Manages business planning process • Supports business needs Zvi Wiener FRM-3 slide 19 Risk Management • Develops risk policies • Monitors compliance to limits • Manages ALCO process • Vets models and spreadsheets • Provides independent view on risk • Supports business needs Zvi Wiener FRM-3 slide 20 Risk Limits • Global risk limit • Risk limits for trading desks/units • Dynamic monitoring and adjustment Zvi Wiener FRM-3 slide 21 Risk Approaches • Accounting - reported P&L • Economic - value • Liquidity needs Zvi Wiener FRM-3 slide 22 Liquidity Rank • Based on forecasts and potential availability of funds. • Hot funds - can be withdrawn quickly. • Stable funds - typically to maturity. Zvi Wiener FRM-3 slide 23 Israel 339 • Definitions of risk types • Relates to all banking institutions • Management structure • Exposure document • Directors and policy • Risk manager • Internal audit Zvi Wiener FRM-3 slide 24 Israel 339 • IR risk • Market risk • Risk audit unit Zvi Wiener FRM-3 slide 25 Israel 341 • Capital requirements against market risk • Risk measurement • Trading portfolio • Reporting • Examples of standard approach and VaR Zvi Wiener FRM-3 slide 26 Israel 341 • Capital requirements against market risk • Risk measurement • Trading portfolio • Reporting • Examples of standard approach and VaR Zvi Wiener FRM-3 slide 27 Qualitative Requirements • An independent risk management unit • Board of directors involvement • Internal model as an integral part • Internal controller and risk model • Backtesting • Stress test Zvi Wiener FRM-3 slide 28 Quantitative Requirements • 99% confidence interval • 10 business days horizon • At least one year of historic data • Data base revised at least every quarter • All types of risk exposure • Derivatives Zvi Wiener FRM-3 slide 29 Types of Assets and Risks • Real projects - cashflow versus financing • Fixed Income • Optionality • Credit exposure • Legal, operational, authorities Zvi Wiener FRM-3 slide 30 Risk Factors There are many bonds, stocks and currencies. The idea is to choose a small set of relevant economic factors and to map everything on these factors. • Exchange rates • Interest rates (for each maturity and indexation) • Spreads • Stock indices Zvi Wiener FRM-3 slide 31 Zvi Wiener FRM-3 slide 32 Zvi Wiener FRM-3 slide 33 Zvi Wiener FRM-3 slide 34 Board of Directors (Basle, September 1998) • periodic discussions with management concerning the effectiveness of the internal control system • a timely review of evaluations of internal controls made by management, internal and external auditors • periodic efforts to ensure that management has promptly followed up on recommendations and concerns expressed by auditors and supervisory authorities on internal control weaknesses • a periodic review of the appropriateness of the bank’s strategy and risk limits. Zvi Wiener FRM-3 slide 35 Forward agreement • Is an obligation on both sides • No initial money transfer • Final price is fixed in advance • Typical cash settlement • Margin account and mark to market Zvi Wiener FRM-3 slide 36 value Forward/Futures T 1 rNIS spot X 1 rUSD Spot Zvi Wiener X $ FRM-3 slide 37 Options • Put or Call • European or American • Underlying asset • Strike price • Premium • Time to maturity • Hedge ratio Zvi Wiener FRM-3 slide 38 Call Option value premium X Zvi Wiener FRM-3 underlying slide 39 value Hedge Ratio X Zvi Wiener FRM-3 underlying slide 40 value Put Option X Zvi Wiener underlying FRM-3 slide 41 Exotic Options • Asian • Path dependent • Digital • Bermudian • Knock-in, out • Exchange of assets • Swaptions Zvi Wiener FRM-3 slide 42 Swap • currency or interest rate • two loans with swapped payments • low credit risk • changes exposure: currency duration Zvi Wiener FRM-3 slide 43 Structured Note • tailor made solution • for example, IO, PO • higher priority obligations or junk • collar, IAS, ratchet, etc. Zvi Wiener FRM-3 slide 44 Collar • Firm B has shares of firm C of value $200M • They do not want to sell the shares, but need money. • Moreover they would like to decrease the exposure to financial risk. • How to get it done? Zvi Wiener FRM-3 slide 45 Collar 1. Buy a protective Put option (3y to maturity, strike = 90% of spot). 2. Sell an out-the-money Call option (3y to maturity, strike above spot). 3. Take a “cheap” loan at 90% of the current value. Zvi Wiener FRM-3 slide 46 Buy stock Result Buy put Sell call Zvi Wiener FRM-3 slide 47 UPC example • Aug 98, a $90M convertible loan to UPC • Feb 99, $49M paid for 1.55M shares (10%) • The share price rose to $162 (5 times) • Four options were used to protect the value Zvi Wiener FRM-3 slide 48 UPC example • Buy 2 put options maturing 06-Feb-2002 put option for 500,000 shares, strike $125 put option for 300,000 shares, strike $153 • Sell 2 call options maturing 06-Feb-2002 call option for 500,000 shares, strike $173 call option for 300,000 shares, strike $212 Zvi Wiener FRM-3 slide 49 UPC 150 After tax capital gain is between $53M and $80M 108 125 153 173 212 UPC share These options cover 800,000 shares only. Zvi Wiener FRM-3 slide 50 How much did it cost? • The results are not precise and very sensitive to volatility if volatility is 10% $6.5M $10M $13M $15M if volatility is 20% if volatility is 30% if volatility is 40% This is the amount the bank should pay to DASKASCH! Zvi Wiener FRM-3 slide 51 Risk Management Issues • Why only half of the bond was called? • Why only 800,000 shares were protected? • How to choose the protection level? • When does it make sense to hedge? Zvi Wiener FRM-3 slide 52 New proposals • BIS 2000 • VaR based approach to credit risk. CreditMetrics CreditRisk+ KMV Merton. Zvi Wiener FRM-3 slide 53 What is the current Risk? • Bonds • Stocks • Options • Credit • Forex • Total Zvi Wiener duration, convexity volatility delta, gamma, vega rating target zone ? FRM-3 slide 54 Standard Approach Zvi Wiener FRM-3 slide 55 Modern Approach Financial Institution Zvi Wiener FRM-3 slide 56