Risk Analysis and Modelling I

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The purpose of the seminar is the presentation of the modern financial risk evaluation. On this part of the course we consider: liquidity risk and interest rate risks. Especially we concentrate on: gap analysis, costs of liquidity, prediction of liquidity requirement; interest rate gap, duration, convexity, improvements of duration’s calculation, goals of management based on the duration analysis, simulations of interest rates behavior. The seminar takes place in computer lab. The final exam consists of “true/false” questions with explanation.

The seminar focuses on the modern risk evaluation and management. We consider: liquidity risk, interest rate risk. Additionally the normative aspect of supervisory regulation in financial institutions is briefly mentioned. Especially we concentrate on:

1. liquidity gap analysis, costs of liquidity (alternative costs of funds and risk neutral probability premium), forecast of liquidity with simple and advanced methods, like for example ARIMA, replicating portfolio approach, liquidity indicators.

On computers we execute: liquidity forecast, estimation of core deposits in bank, calculation of replicating portfolio, calculation and investigation of liquidity adjusted value at risk.

2. measurement of interest rate risk: interest rate gap, duration, convexity (other advanced measures), interest rate modeling: spot rate curve estimation (Nelson-Siegel approach), introduction to modeling short rate evolution via stochastic models (e.g. Vasicek model), interest rate risk management: goals of management based on the duration analysis.

On computers we execute: simulation of net income affected by interest rate changes, duration analysis with extensions (for example, scenario simulations), impact of normative regulations on the choice of interest risk evaluation in financial institutions, estimation of yield curve based on stochastic evolution of spot rates.

REQUIRED:

1. L. Matz, P. Neu, "Liquidity risk measurement and management", John Wiley & Sons, 2006 (selected chapters)

3. D. Uyemura, D. van Deventer, „Financial risk management in banking", Probus Publishing, 1993

RECOMMENDED:

1. K. Dowd, "Measuring market risk", John Wiley & Sons, 2005 or

2. C. Alexander, “Quantitative methods in finance”, Volume 1 & 4, Wiley, 2009

Student has knowledge about types of financial risk, basic method of measuring and managing the risk in financial institutions and enterprises. S2A_W06, S2A_W07

Student can evaluate basic types of risk with simple models created in spreadsheet. He or she is able to recognize the impact of regulatory requirements on risk assessment. Student can apply different risk measures to the purposes of risk analysis, for example to calculate the gains or losses on the position or to increase the net income of the investment without rapid growth of risk. S2A_U02, S2A_U03, S2A_U04, S2A_U05, S2A_U06

Student is aware of how risk management can reduce the regulatory capital requirements and ensure the compliance with risk standards. The student implements the credit requirements on time. S2A_K01, S2A_K03, S2A_K04, S2A_K07

The final exam consists of 10 “true/false” questions with explanation. Only explanations are assessed and summed up. Max. two absences are acceptable.

In the case of online course there will be four multiple choice tests about the understanding of concepts presented during the seminar and at the end two task to do: one in excel and one in R. They will be prepared in the real time..