Risk Analysis and Modelling II

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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 calculate: value at risk calculation, currency limits, portfolio analysis in currency basket modification, capital requirement for the currency and credit risk; different forms of credit scoring and credit rating, credit default models, models of credit risk based on options pricing, migrations matrices and its further augmentation. 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: value at risk, currency risk, and credit risk. Additionally the normative aspect of supervisory regulation in financial institutions is briefly mentioned. Especially we concentrate on calculation of:

1. value at risk, expected shortfalls, portfolio analysis in currency basket modification.

On computers we execute: calculation of value at risk with three basic methods, reduction of currencies in basket portfolio, modelling correlations and volatilities in Monte Carlo simulation, Cholesky decomposition, introduction to use of copulas, calculation of VaR with GARCH models.

2. different forms of credit scoring (Altman’s model, logit model, methods of classification, neural network, genetic algorithms). The most important models quantifying contemporary risk exposure, such as: credit default models (both in default mode - DM, and in marking to market mode - MTM), models of credit risk based on options pricing (e.g. KMV Model), credit migration's matrices (Creditmetrics, Credit Portfolio) and its further augmentations.

On computers we execute: scoring rating of retail customers sample, migration matrices calculation, estimation of the default probability in KMV model and distance to default, Credit Risk Plus mass-of-probability-change over time.

REQUIRED:

1. C. Alexander, “Market risk analysis”, vol. 1 & 4, John Wiley & Sons, 2008

RECOMMENDED:

1. P. Best, "Implementing value at risk", John Wiley & Sons, 1998

2. D. DeRosa, „Managing foreign exchange risk”, Irwin, Cambridge 1996

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

4. A. Saunders, „Credit risk measurement", John Wiley & Sons, 1999

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

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 value at risk or to increase the net income of the investment without rapid growth of risk.

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.

KW01, KW02, KU01, KU02

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