A number of banking, market risk and treasury customers have recently inquired about our course offering on the Setting Risk Limits topic.
Given the rise in volatility and the increased regulatory supervision for market risk, the limit setting, monitoring and controlling piece is becoming increasingly visible. There is similar interest in using an extension of this framework for setting counterparty limits.
Here is a quick reference guide to courses available on our two stores. Please feel free to walk through the samples first before you pick one or more of the following offerings.
Setting Value at Risk, Stop Loss, Pre-settlement Risk and Counterparty Limits
In the video course we consider how VAR is used in allocating, calculating and defining optimal levels for limits: Stop Loss Limits, Pre-Settlement Risk (PSR) Limits and Margin haircuts for bonds. We discuss how to set up stop loss thresholds without hindering trading while taking into account market volatility, i.e. median likelihood trading loss threshold. We consider how a financial institution’s board of directors interprets and assesses the credibility of VAR results.
We show how Stop Loss may be calibrated to the VaR threshold. For PSR limits we review the market practice of using average volatility in the calculation of counterparty limits and we highlight the value of using a measure based on the maximum trailing volatility as well as the importance of carrying out a frequent, dynamic review of the limits management system in light of a changing market environment.
Pre-requisite videos courses for this course are:
PDF & EXCEL Package:
We also offer a Setting Counterparty limits PDF & EXCEL combo package. The excel file provides an example of how pre-settlement risk limit is determined using a VaR-based approach.
These Value-at-Risk (VaR) based counterparty limits are calculated by:
- Deriving a return series from historical price series
- Deriving a volatility measure from the return series
- Determining a worst case price shock based on the volatility measure, a confidence level and the days to the settlement of the contract
- Determining the PSR limit in absolute terms as well as in relation to the contract value