Smart About Risk
 

Market Risk

Advanced Risk Management, s.r.o. offers its services to financial and non-financial companies in the area of market risk.  

 

In the area of market risk we also offer professional seminars in the form of open and in-house seminars.  
See our offer of CADCalc®Market a software tool for effective market and liquidity risk management.

 

Offer for Financial Institutions 

Quality of Market Data

  • A proposal of methods for assessing the quality of market data used for the instruments valuation and risk models.
  • Assessment of existing methods for an analysis of market data used in models to evaluate the instruments and measure the level of market risk.
  • Assistance in the technical implementation of methods to assess the quality of market data, i.e. to assess whether information used by a bank in its market risk models is complete and correct.

Valuation of Instruments

  • A proposal of methods (or an assessment of existing methods) for evaluation of the financial and capital market instruments, including the instruments with limited liquidity.
  • One-time or regular (on the basis of a long-term contract) valuation of client’s specific portfolio
  • The services stated above include a wide spectrum of instruments, mainly:
    • Debt instruments: treasury bills, bonds, loans and repo operations,
    • Equity instruments: common equity shares, mutual fund shares,
    • Currency and interest rate derivatives: FX spots, forwards, swaps and options, FRAs, interest rate swaps (plain vanilla IRSs, CIRSs, amortized swaps), swaptions,
    • Commodities and commodity derivatives: positions incommodities, commodity forward and commodity swap,
    • Credit derivatives: CDSs, Credit-Linked Notes (CLNs), securitization,
    • Structured products.

Models of Measuring Market Risk

  • A proposal of methods (or an assessment of existing methods) for measuring the level of a portfolio market risk and total or individual parts:
    • Currency (exchange rate) risk,
    • Interest rate risk,
    • Equity risk,
    • Commodity risk.
  • Assistance in the technical implementation of models for measuring the level of market risk bothpartial (by individual components of the market risk) and total risk.
  • Used methods and approaches include mainly the following:
    • Currency (FX) position,
    • Interest rate gap analysis,
    • Duration,
    • Convexity,
    • Sensitivity analysis, e.g. BPV (Basis point value),
    • Stress scenarios – for more details see the section on ‘Stress Testing’,
    • Value at Risk – determination of the maximum possible financial loss in a certain time period which can occur with the ready, defined probability (utilization of different approaches: Historical simulation – absolute or relative, covariance matrix method, alternatively its extension to the so-called Quadratic Model, Monte Carlo Simulation) – with the possibility to extend the model by determination of so called Expected Shortfall – the amount of average loss in case it exceeds the Value at Risk.
  • Utilization of the model results for the capital request calculation towards the market risk of the commercial book.

Back Testing of Model Results

  • A proposal of methods (or an assessment of existing methods) of back testing for monitoring the conformity of estimation of the loss caused by market risk with losses which really occurred using the following methods:
    • Model Back Testing – hypothetical (model) back testing,
    • Dirty Back Testing – real back testing based on the actual P&L, including trading fees,
    • Clean Back Testing – real back testing based on the actual P&L, net oftrading fees.

Stress Testing 

  • Creation of a comprehensive stress testing framework.
  • Creation of specific proposals of stress scenarios for crises situations to simulate events which do not usually occur in banks (modelling extreme changes of the risk parameter values):
    • Historical scenarios – a structure on the basis of important events which occurred in the past,
    • Hypothetical scenarios – what-if situations based on expert opinion.
  • Analysis of the impact of stress scenarios on the portfolio value (analysis of the individual parameters and the entire set of defined parameters).
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Limits for Market Risk Management 

  • A proposal of methods for setting market risk management limits.
  • Assessment of the existing methods of the limit creation and a subsequent review of the existing limits definitions.
  • Assistance in setting the limits for market risk management with utilization of historical data and our know-how, and assistance in the subsequent design of the process to monitor the various market risk indicators.

Analysis of the Market Risk Management System 

  • Analysis of the existing state of market risk management:
    • Assessment of suitability of the existing methods for valuation of the traded instruments and for measuring the level of market risk.
    • Assessment of the technical implementation of the existing methods (assessment of correctness of the developed models and their implementation in SW tools, including the analysis of correctness and ‘purity’ of data used).
    • Verification of the procedures for market risk management and setting limits.
  • Submission of proposals on the changes necessary for the increase in efficiency of the measurement system and market risk management with a focus on the following areas:
    • Does the communication between individual departments take place sufficiently and on time?
    • Does the transfer of information (data) about trades between individual systems/applications take place without errors?
    • Are the systems/applications used in market risk management suitable and not duplicating their activity? Is it possible to improve these systems/applications?
    • Are the limits set properly and is their monitoring done regularly?
  • Inspection of sufficient documentation of the market risk management system (strategy).
  • Analysis of the systems which are created in the scope of reporting and assessment of the method of their utilization in the process of decision making.

Market Risk according to Basel II

  • In support of measuring market risks in the scope of Basel II (or Basel III):
    • Inspection of models for the capital request calculation towards market risk (risk of the trade book) – of the methodical correctness as well as the technical implementation of calculation,
    • Assistance in developing the application for the capital request calculation.
  • A proposal of the form of the reporting status and development of market risk in time for both the risk partial components (currency, interest rates, equity and commodity risk) and for all the risk components together.
  • A proposal of methods or delivery of the software tool for the need of regulatory record keeping.
  • Assistance in the implementation of processes, reports and applications within Basel II (or Basel III) in everyday use – not only in the scope of the risk management department but also in other parts of the bank.
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Offer for Non-Financial Institutions 

Valuation of Instruments

  • A proposal of methods (or an assessment of existing methods) for evaluation of the financial and capital market instruments, including the instruments with limited liquidity.
  • One-time or regular (on the basis of a long-term contract) valuation of client’s specific portfolio
  • The services stated above include a wide spectrum of instruments, mainly:
    • Equity instruments particularly: bills, bonds, credit and repo operation,
    • Currency instruments particularly: shares, fund,
    • Currency and interest rate derivates – mainly currency spot, forward, swaps or options, FRA, interest rate swap (plain-vanilla IRS, CIRS, amortized swaps), swaps,
    • Commodities and commodity derivates – position in the commodity, commodity forward and commodity swap,
    • Credit derivates - CDS, Credit-Linked Note (CLN), securitization,
    • Structured products.

Analysis of Market Risk Management and Setting Limits

  • Assessment of the rules for market risk management.
  • Assessment of the correctness and completeness of the internal regulations for market risk management and a proposal on the possible modifications.
  • Assistance in setting the limits for market risk management with utilization of historical data and ARM know-how.
  • Inspection of the correctness of the limit system and the relevance of setting the limits in connection with the amount of the realized loss of market risk.

Commodity Risk

  • Modelling the development of market prices of commodities on the basis of econometric models created from a historical development of these prices.
  • Administration of these models when the preconditions change.
  • The possibility of using the proposed econometric models in modelling Cash Flow at Risk, alternatively for determination of Profit at Risk (see also section “Cash Flow at Risk and Profit at Risk“).

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Cash flow at Risk and Profit at Risk 

  • Creation of a model of:
    • Cash flow at Risk for a projection of incomes and expenses under stress conditions based on our financial instrument valuation know-how and the historical behaviour of customers and suppliers – determination of deviations of actual cash flows from planned cash flows on a given confidence level for a given time period.
    • Profit at Risk for measuring deviations of the real profit from the planned profit on a given level of reliability for a certain time period.
  • Modelling of investment or project profitability; such models are subsequently used in the process of decision making (planning) in a company/enterprise.
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