1. Course Content

1. RISK LIMITS AND CONTROL PROCESS

a. Operational (Exception or Management Action) Limits
b. Capital Loss & Stop Loss Limits
c. Inventory Age Limits
d. Concentration Limits
e. Transaction Limits
f. Exposure and Sensitivity Limits
g. Pre Settlement Risk (PSR) and Potential Future Exposure (PFE) Limits
h. Hierarchy of Limits

2. A MORE DETAILED LOOK AT LIMITS

a. Capital Loss and Stop Loss Limits
b. Value-at-Risk Limits
c. Regulatory Approach Limits
d. Other Limits

• Duration Limits
• Convexity Limits
• PVBP Limits

e. Credit Risk Limits

• PSR Limits
• Settlement Risk Limits
• Financial Institution (FI)/ Counterparty Limits
• Regulatory Limits
• Internal / Concentration Limits

f. Application to Products

g. Setting Limits for Liquidity Risk

• Cash flow mismatch or gap limits
• Maturity Limits
• Target Liquid Reserves
• Concentration Limits
• Contingent liability limit
• Review

h. Setting Limits for Interest Rate Risk

• Repricing limits

i. Limit Breach, Exception processing, Action Plan for Trigger Zones

• Exception Handling
• Example of an Action Plan for Trigger Zones

ANNEXURE – CALCULATING VALUE AT RISK

1. INTRODUCTION

2. VAR METHODS

a. Variance Covariance Approach
b. Historical Simulation Method
c. Monte Carlo Simulation
d. Quick Review
e. Implementing VaR

3. METHODOLOGY

a. Setting the Scene

• Sample Portfolio

b. Preliminary steps

c. VaR Approach Specific Steps

• Variance-Covariance (VCV) VaR
• Determining Historical Simulation daily VaR

d. Scaling of the daily VaR

4. CAVEATS, QUALIFICATIONS, LIMITATIONS AND ISSUES

EXCEL Examples

Yes – Available for sale

The example calculates the Pre-settlement Risk (PSR) limits for Commodity and FX forward contracts.

2. Introduction

Risk models only have value if they are used effectively in combination with a limit management and control process. While a control function requires and relies on reports, the key is not generation of quantitative numbers, formatted in ten different variations and cuts; it is the interpretation and application of that analysis that matters. The objective of a risk function is to not just gather data, run reports, submit and analyze them; it is to ensure that unpleasant surprises and their impacts are limited. While you can’t control the timing and magnitude of such surprises, a well managed and well run risk function can help manage expectations as well as plan ahead for unexpected shocks.

Limits play a major role in achieving that objective. But where do you start when you first review limits. How do you decide what is acceptable and what is not.

3. Buy this course

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