Day One 

An Intuitive View of Probability Theory

This section will provide participants with an understanding of the nature of risk and the fallacies associated with most models due to historical data and the normal distribution.  Coverage of the third and fourth moments of distribution and the relationship to black swan events are done in a non-mathematical approach and instead covered using an intuitive methodology.

Key topics

• Understanding the corporate form as a Nexus of contracts
• Review price development and processes
• Understanding the nature of risk
• Discuss what drives volatility
• Calculating volatility
• Tail risk and the volatility of correlation
• Black swan events

Group work to estimate various levels of variance, skew and kurtosis

Understanding Risk Classifications and Treasury ALM

This section provides a structured review of classifying risk to create enhanced understanding and better measurement and proper application of tools and techniques to manage.  It also provides an overview of the role of Treasury ALM.

Key Topics

• Risk appetite determination
• Risk classification
  • Liquidity
  • Market
  • Credit
  • Operational
  • Regulatory
  • Strategic
• Assets and liabilities of a bank
• Funding, Liquidity and Market Risk in a bank
• Treasury role in managing funding, liquidity and market risks of the bank
• The activities of the Treasury Department in Asset Liability Management
• Managing risk: BOD business strategy and Risk Appetite Policy
• Asset Liability Committee activities and Treasury

Asset and Liability Gap Analysis

This section reviews the essence of Treasury ALM using Gap Analysis. Participants are provided with an understanding of the nature of the balance sheet and how Treasury must measure and assess uncertain asset returns and balance this with funding costs from the liabilities side of the balance sheet.  Multiple examples of items from both sides of the balance sheet are reviewed to provide a contextual understanding of returns and costs.

Key topics

• Challenges of Maturity Transformation
• Selecting appropriate time buckets
• Distribution of maturing and non-maturing assets and liabilities
• Introduction to behavioral modelling 
• Adjusting for prepayment and redemption 

Funding Costs and the Yield Curve

The ALM function analysis begins with a review of the right-hand side of the balance sheet to look at the role of the yield curve and associated costs versus maturity and risk. This includes both the structure of the curve and the risks at various points along the curve.

Key topics

• Interest rate risk and the yield curve 
• The benchmark rate: The credit risk free benchmark yield curve
  • Liquid government bonds: Treasuries, JCB, Gilts, Bunds
  • Inflation expectation- Liquidity premium
  • Credit Spread and the pricing of debt
  • Credit Spread on yield curves
  • Government bonds
  • Libor and Euribor banks: Ratings and credit spread over time
  • Credit spreads for loans
• Using to price funding cost and asset returns of current assets and liabilities 
• Understanding the zero coupon and forward rate and their use in market risk management 
• Bootstrapping and Calculating the zero-coupon rate 
• Calculating the forward rate 

Funding Short Term Requirements

Since a sizable portion of funding requirements are short term in nature, the next topic reviews these costs and risks with comparison to other STIR products.  Risk management and hedging are reviewed in context as well.

Key topics

• Funding the Bank short term: Deposits (retail, corporate and wholesale) and Money Markets
• The interbank and other over the counter funding market
• Interbank money market products: Libor, Euribor, local inter-bank, Repo, reverse repo etc.
• Other Money Market products: Commercial Paper, Certificate of Deposit, Commercial Bills

Day Two

Bond Market Risk Management

During this session participants start by building a bond pricing model in Excel. This exercise brings to life the practicalities of bond cash flows and issues surrounding day count fractions. Participants then study duration, DV01 and the various risk management measures and build these within the pricing model. The session concludes with case studies where the risk management techniques are applied.

Key topics:

• Bond pricing
• Modified duration
• Risk measurement - DV01, PVBP, Dollar duration, PV01
• Profit and loss from bond transactions
• Hedge ratios

Practical Interest Rate Swap Pricing and Risk Management

This session is highly interactive and somewhat technical in nature. Participants will build an interest rate swap pricing model in Excel whilst at the same time studying the mathematical relationships between par swap rates, discount factors and forward rates. When the model is completed a series of existing and new interest rate swaps will be priced so that participants can maximize their understanding of the mechanics of this important financial market product.

Key topics:

• Payment dates and periods
• Day count conventions
• Bootstrapping
• Discount factors
• Swap and forward rates
• Interpolation between dates
• Calculating cash flows
• Pricing interest rate swaps

Derivatives Introduction

This session introduces participants to the fundamentals of futures, options and swaps. The starting point is the key features of futures; namely pricing and the margin process. Participants will also consider the benefits of futures versus over the counter forwards. The key definitions of options follow and participants are encouraged to consider options from the point of view of a deferred decision to invest. Pay-off profiles form a large part of the course, before the key issues of volatility are addressed. The final part of the session looks at swaps: interest rate, cross currency, equity and credit default. Using these derivatives to create solutions for banking clients is a key emphasis of the course.

Key topics:

• Fundamentals of derivatives
• Definitions and features
• Futures
• Options
• Swaps
• Hedging strategies

Bond Futures

Bond futures are an important hedging tool in fixed income markets. During this session participants will follow cash and carry pricing principles to model the fair futures price. Once this has been mastered the session moves on to computing hedge ratios and using bond futures to hedge portfolios of bonds.

Key topics:

• Contract specifications
• The delivery basket
• Conversion factors
• Implied repo rate
• Hedge ratios
• Hedging using bond futures
• Spreadsheet work to develop bond futures pricing model, understand the implied bond options and conversion factors

Day Three

Funding Longer Term Requirements

This section will provide participants with an overview of the major costs and hedging approaches for dealing with the more permanent funding costs for the bank.  A thorough coverage of various bond markets and costs are covered along with other costs associated with hedging and risk management.

Key topics

• Fixed Income Products
• Bond market structure
• Understanding and using bond mathematics
  • Convention, Liquidity and Pricing
  • Duration and Bond Pricing/Trading
  • What is duration?
  • Modified Duration and its impact on bond price
  • Calculation of Duration and Price movement
• Convexity and Bond Pricing/Trading
• Bond Issuance Process
• Hedging applications

Equity Components and Regulatory Capital

This section looks at the equity capital as the final funding cost.  This component is highly regulated and covered in that context.  The concept of liquidity risk management dovetails into this coverage.

Key topics

• Liquidity risk regulations
• Characteristics of liquidity risk management
• Stress testing model
• Stress Testing Under Basel II
  • The three pillars
  • Defining Scenarios
• Common usage of stress tests
• IFRS 9 and Stress Testing
• Stress Testing Analysis
• Scenario Analysis

Liquidity Risk Management

Based on the coverage of risk regulations this section reviews the role of Treasury in the context of regulatory requirements and funding coverage.  It also looks at the most recent regulatory requirement of stress testing and how this is modeled.

Key topics

• Role of Treasury
• Regulatory requirements for liquidity risk management
  • Liquidity coverage ratio (LCR)
  • Net stable funding requirements (NSFR)
  • Ratios
  • Systemic risk – Liquidity risk in the financial crisis (2007-08)
• Stress Tests For LRM
• Institution Specific Stress Testing
• Top Down Identification of Bank liquidity events
  • Historical Liquidity Events
    • Northern rock
    • Lehman’s
    • Soc Gen
    • European Government Bond Crisis
• Bottom-up risk analysis
  • Liquidation
  • Unexpected collateral pledge
  • Unexpected cash flow

Duration GAP Management Approaches

This section summarizes the Treasury ALM function using the Duration weighting methodology for GAP management.

Key topics

• Measuring duration of assets and liabilities
• Duration weighting
• Adjusting asset liability mix for better interest rate risk management

What Can We Learn from History / Back Testing 

The final section reviews what can be learned from history using various specific examples that have caused structural breaks in markets and disjointed market movements.

Key topics

• LTCM / Amaranth / Asian Crisis 1997 / Russian Debt crisis 1998
• Financial Crisis 2007 onwards
• US Terrorist Attacks
• Iraq War 2003/4

What’s Next?

• In groups discuss possible plausible scenarios which might cause a dramatic loss or fatal collapse to the bank. Think specifically about your Bank.
• Some past and possible events to consider.
  • Barings / Soc Gen / UBS
  • Brexit
  • Break Up of the Euro
  • Trade Wars
  • Cyber Attack on the HK or New York Stock Exchange
  • Impact of a major rise in the US $ on Emerging Market Debt

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