This section reviews learning objectives and included materials for the following continuing professional education courses (CPE) available under the FinanceTrainingCourse.com **Continuing Professional Education Certification Compliance program**

**Asset Liability Management****Derivative Pricing, Delta Hedging & Option Greeks**

## CPE Credits – Structured Learning – ALM – Asset Liability Management

The ALM Course is divided into the following core components

- ALM Primary Guide
- Building Maturity Profiles
- Basel III Liquidity coverage ratios updates
- Excel Sample templates
- Video course on ALM & Capital Adequacy

### CPE Credits – ALM Course – Primary Study Guide

Asset Liability Management (ALM) involves taking decisions and actions regarding assets and liabilities in an integrated manner in order to manage the business of the entity and meet the organization’s financial objectives. It is a continuing process that involves formulating, implementing, monitoring and revising strategies related to its assets and liabilities keeping in mind the entity’s risk tolerances and constraints. The Asset Liability Management (ALM) Crash course covers the following topics:

Definitions of the primary risks that the ALM tools address namely interest rate mismatch risk and liquidity risk. Pre-requisite topics used as foundation for measures mentioned later in the course:

- Duration and Convexity
- Value at Risk (VaR)
**Step by Step methodologies for ALM tools, in particular:**

- Market Value of Equity (MVE)
- Earnings at Risk (EAR)
- Cost to Close – interest rate risk measure
- Cost to Close – liquidity risk measure
- Rate sensitive gap
- Price sensitive gap
- Liquidity gap
- Net interest income at risk
- Duration gap analysis

**A review of real-world applications of ALM including:**- A simple bank example involving duration matching and immunization
- A Pension fund example involving dedication or Cash flow matching
- Other Liquidity Risk Measurement tools such as liquidity ratios (e.g. Debt-to-Equity ratios) and analytical statistics (e.g. unused lines of credit)

**An overview of a liquidity management framework including:**- Setting up liquidity limits (e.g. cash flow mismatch limits, concentration limits)
- Contingency Funding planning to identify and develop funding sources, assign responsibilities for various liquidity need and stress environments and predefine triggers to warn against a potential stress situation for initiation of necessary timely action
- Liquidity enhancement tactics both for a systemic crisis as well as for a company-specific crisis

### CPE Credits – ALM Course – Building Maturity Profiles

In this course we build detailed liquidity and maturity profiles for the deposits and advances portfolio of a bank using the PivotTable and PivotChart functionality in EXCEL. We will walk through the process of:

- Preparing the bank data set for deposits and advances.
- Completing the analysis required to prepare the liquidity and maturity profile of both advances and deposits of the bank.
- Reviewing the five dimensions of analysis for the assets and Liabilities including size, cost, concentration by number, concentration by amount and maturity.
- Laying the foundation for linking this work with the ALM models and tools discussed separately in our ALM crash course.

### CPE Credits – ALM Course – Basel III Liquidity updates

The Basel Committee has published the liquidity portion of the Basel III reforms to the capital and liquidity framework. These reforms cover the supervisory framework for liquidity risk measurement via two minimum funding liquidity standards. The course gives an overview of:

Elements of the new supervisory liquidity ratio standards – the Liquidity Coverage Ratio (LCR) and the Net Stable funding Ratio (NSFR).

The 5 metrics that banks will be required to use to monitor their liquidity position on a consistent basis namely:

- Contractual Maturity Mismatch
- Concentration of funding
- Available unencumbered assets
- Liquidity coverage ratio (LCR) by currency
- Market related monitoring tools for monitoring data at market wide, financial sector and bank-specific levels.

It then presents a framework for estimating liquidity risk capital for a bank and concludes with liquidity risk management case studies drawn from the 2008 financial crisis, in particular it looks at:

- The collapse of Bear Stearns
- The bankruptcy of Lehman Brothers
- The bailout of AIG

### CPE Credits – ALM Course- ALM & Capital Adequacy video course

ALM and Capital Adequacy Course serves as a introduction as well as a refresher course to Asset Liability Management. The course is divided across a number of core topics from basic concepts such as duration and convexity to more advanced topics such as ALM measurement tools. The following topics are covered in the course:

- Introduction to ALM
- Interest Rate/ Maturity Mismatch Risk and Liquidity Risk
- Duration and Convexity, including relationship with options and volatility
- Asset and Liability Sensitivity
- ALM framework
- Building blocks for an ALM model
- ALM measurement tools
- ALM reporting
- ALM Stress Testing
- Introduction to Capital Adequacy (including a background of capital adequacy regulation)
- Internal Capital Adequacy Assessment Process (ICAAP) & Liquidity Risk Capital Extensions

### CPE Credits – ALM Course- ALM Excel Templates

The Asset Liability Management (ALM) EXCEL Examples includes 4 EXCEL files that present fully worked out procedures for the following ALM measurement tools:

#### a. ALM Reporting – Market Value of Equity Analysis

The Fall in Market Value of Equity measurement tool calculates the impact of interest rate changes on the market value of equity of an entity. The Change in the Market Value of Equity is calculated by determining the changes to the market values of the entity’s asset and liability portfolios respectively resulting from stressing or shocking the underlying interest rate term structure using a Value-at-Risk (VaR) based approach.

#### b. ALM Reporting – Earnings at Risk Analysis

The Earnings-at-Risk (EAR) measurement tools calculates the impact of interest rate changes on the earnings of an entity. The rate shocks applied to the asset, liability and off-balance sheet interest sensitive items of the entity’s portfolio will be based on a Value-at-Risk (VaR) approach. The differences between the change in interest income/ expenses that results because of these shocks are calculated for each tenor bucket and then summed to arrive at the EAR number i.e. the overall impact of non-parallel interest rate shifts on the earnings of the entity.

#### c. ALM Reporting – Cost to Close – Interest Rate Risk perspective

The tool is used to measure interest rate risk, i.e. the risk that the net interest revenues that could be earned on excess funds (i.e. where liabilities exceeds assets or negative gaps) will be adversely affected by movements in the interest rates.

#### d. ALM Reporting – Cost to Close – Liquidity Risk perspective

This tool is used to measure liquidity risk, i.e. the risk that there is a deficiency of funds due to cash outflows (assets) exceeding cash inflows (liabilities) during a given period. An entity has recourse to two options in this situation either decrease its assets e.g. by selling off assets or increase its liabilities e.g. by borrowing from the market. This particular measure looks at the latter approach where it is assumed that positive gaps will be filled by borrowing from the market, usually at a rate that is at a premium over the risk free rate.

## CPE Credits – Derivative Pricing, Delta Hedging & Option Greeks

The Delta Hedging & Option Greeks course includes the following CPE learning modules

**Derivative Pricing & Black Scholes Model Review and refresher module**

**Introduction to vanilla derivative products****Derivative pricing basics using Monte Carlo simulation****Understanding N(d1) and N(d2)****Monte Carlo Simulation Excel Spreadsheet template****Understanding N(d1) and N(d2) Excel Spreadsheet template**

**Delta Hedging & Option Greeks module**

**Delta Hedging & Option Greeks – Primary Study Guide****Delta Hedging & Option Greeks – Supporting Excel Files**

### CPE Credits – Delta Hedging – Derivatives Terminology Crash Course & Refresher

An introductory course focused on derivatives terminology for beginners.

Quick review of basic vanilla derivative products: forwards, futures and options, are introduced together with simple examples to illustrate each instrument as well as to highlight the differences between them.

A discussion of payoff profiles follows beginning with a generic payoff profile first and then moving on to specific ones for forwards and call and put options. These three derivative products act as building blocks for synthetic configurations and the next section presents the payoff profile of one such synthetic option.

### CPE Credits – Delta Hedging – Monte Carlo Simulation – Video Course

The “Option Pricing using Monte Carlo Simulation” combines both theory and practice and uses model building and option pricing exercises as learning tools to tie in a number of essential topics such as:

- The difference between and the significance of the risk-adjusted probabilities of the Black Scholes option pricing model
- The intuition behind the Black Scholes European call option formula
- Overview of how to create a Monte Carlo simulation model of the Black Scholes solution in Excel
- Estimating errors of and improving results generated from the Monte Carlo simulation model
- Pricing vanilla and exotic options using the Monte Carlo simulation model

The course splits the time evenly across 135 minutes between building a model step by step in EXCEL and working with the model to price and value derivative products.

### CPE Credits – Dynamic Hedging – Understanding N(d1) & N(d2) – Video Course & EXCEL Spreadsheet

The theoretical overview considers the various elements underlying the Black-Scholes European call option formula, whereas the practical application involves the creation of a Monte Carlo simulation based model in Excel to further clarify these concepts.

The solution of the closed-formula Black Scholes European Call option formula is derived using a Monte Carlo Simulator. The purpose is to build an intuition of how the formula works, in particular, what risk adjusted probabilities N(d1) and N(d2) mean.

The worksheet consists of three elements:

#### 1. Inputs:

- Required for the Black Scholes formula, i.e. spot price, strike price, volatility, time to maturity, risk free rate; and the number of time-steps to be considered for the Monte Carlo simulator.

#### 2. Outputs:

- True values of N(d1), N(d2) and call premium using the closed form Black Scholes formula.
- Path Dependent Prices including Terminal price generated using the MC simulator, graphical representation of price path.
- Logical test for Terminal Price exceeding Strike Price that returns 1 if the condition is met or zero if it is not, unconditional expected Terminal Price, conditional expected Terminal Price, minimum, maximum and average Terminal Price.

#### 3. Results warehouse:

To store the results for 30 simulated iterations including averages of outcomes across iterations:

- Terminal Price.
- Logical test, which gives the risk adjusted probability N(d2)).
- Conditional terminal price given that it is greater than strike price.
- SN(d1), which is the expected conditional term price times the probability that the terminal price is greater than the strike price times the present value factor

### CPE Credits – Understanding Delta Hedging & Greeks – Primary Study Guide

* This book is based on a four part MBA course on derivative pricing and risk management taught in Dubai and Singapore at the SP Jain School of Management by the author*.

We spend time on ground rules, behavior and intuition. As a trader I am more likely to ask you about how Gamma is going to behave under a given scenario and how that is different from Vega’s reaction rather than ask for the formula (I may, depending on the mood and how much I dislike you). I am more interested in how you think, your ability to grasp a concept and your intuition than your memory.

The only way to do this then is to give you live EXCEL models with the text. Read the chapter, dissect the model, load up on intuition. Repeat. Numbers and graphs that we have tweaked ourselves with our hands have a high chance of being retained, than those on printed papers or electronic screens.

A study guide that walks through Option Price Sensitivities and Greeks behavior, helps you plot the same in EXCEL, use a dynamic Delta hedging simulation to get you comfortable with the majors and uses a Cash PnL simulation to dissect the minor Greeks. The complete package includes a 73 page study note and 3 Excel spreadsheets.

### CPE Credits – Delta Hedging & Greeks – Monte Carlo Simulation – Excel Files

#### 1. Greeks Calculator and Graphs collection

- Calculation of the Black Scholes option price for a European Call and a European Put option
- Calculation of Greeks- Delta, Gamma, Vega, Theta & Rho- for a European Call and a European Put option
- Data table that captures the Black Scholes risk adjusted probabilities and option premium across a series of volatilities
- Graphical representation of Black Scholes risk adjusted probabilities and option premium against volatilities
- Data tables that capture the sensitivity of the Greeks against Spot, Strike, Time to maturity, Volatility and the Risk Free Rate respectively
- Graphical representation of the sensitivities of the various Greeks against Spot, Strike, Time to maturity, volatility and risk free rate respectively

#### 2. Delta Hedging – Call Options

- Calculation of a 12-step Monte Carlo simulation model that generates the underlying stock price series
- Calculation of theoretical option values using the Black Scholes call option price formula
- Calculation of call option deltas at each rebalancing interval
- Calculation of a replicating portfolio that consists of a long position in Delta times the stock and a short position in the amount borrowed (net of the option premium received at inception) to fund the initial & subsequent incremental purchases
- Graphical representation of the theoretical option value and the replicating portfolio value over the life of the option
- Calculation of a tracking error for the difference between the value of the replicating portfolio and the theoretical value of the option
- Graphical representation of the tracking error across the life of the option
- Determination of the per period interest and principal portions of the amount borrowed
- Determination of the Gain (Loss) on sale of portions of the stock
- Setting up a Cash Accounting P&L that shows cash inflows from option premium received and strike received in the event the option is exercise and cash outflows from interest and principal repayment on the amount borrowed
- A choice of including of excluding the option premium in determining the amount borrowed at inception. In this case the Principal repaid will equal the gain (loss) if the option is not exercised.
- 100 simulated runs including a graphical depiction of the results showing the Net P&L, Amount borrowed (principal & interest) and Gain/ Losses; and averages across the 100 runs for each of these items

#### 3. Delta Hedging – Put Option

- Calculation of a 12-step Monte Carlo simulation model that generates the underlying stock price series
- Calculation of theoretical option values using the Black Scholes put option price formula
- Calculation of put option deltas at each rebalancing interval
- Calculation of a replicating portfolio that consists of a short sale of Delta times the stock and lending of the initial (net of the option premium received at inception) & subsequent incremental short sales proceeds
- Graphical representation of the theoretical option value and the replicating portfolio value over the life of the option
- Calculation of a tracking error for the difference between the value of the replicating portfolio and the theoretical value of the option
- Graphical representation of the tracking error across the life of the option
- Determination of the per period interest and principal portions of the amount lent
- Determination of the Gain (Loss) on closing of short sale positions
- Setting up a Cash Accounting P&L that shows cash inflows from option premium received, interest earned on amount lent and sales proceeds from short sales and cash outflows from strike paid if the option is exercised
- A choice of including or excluding the option premium in determining the amount borrowed at inception. In this case the sales proceeds from short sales will equal the gain (loss) if the option is not exercised.
- 100 simulated runs including a graphical depiction of the results showing the Net P&L, Proceeds from Short Sales, Interest Earned and Gain/ Losses; and averages across the 100 runs for each of these items