Setting Counterparty Limits - Package
About the Course
Risk models only have value if they are used effectively in combination with a limit management and control process. Limits play a major role in well run risk function to help manage expectations as well as plan ahead for unexpected shocks.
The Setting Counterparty Limits course begins with the “Setting Counterparty Limits-PDF Study Guide”. The course discusses the core principles behind setting limits as well the monitoring and control processes. A brief overview of the various categories of limits and the hierarchy in setting limits are presented. The limit reporting and exception review processes are described. Various types of limit exceptions are defined.
Numerical examples of various limits are illustrated, such as capital loss and stop loss limit, VaR limits, VaR based regulatory approach limits, duration, convexity & PVBP limits. Credit risk limits such as pre-settlement risk (with supporting EXCEL file “Setting Limits - EXCEL”) and counterparty limits are also described. The applications of these limits for various products are listed. Types of liquidity risk and interest rate risk limits are described.
A method for handling limit exceptions is presented and a sample action plan for trigger zones indicated by early warning metrics and limits is described.
The course includes “Calculating Value at Risk” as an annexure which gives an overview of the various Value at Risk (VaR) calculation methods and a step by step walkthrough of the Variance Covariance and Historical Simulation approaches to determining VaR.
A sample Credit Appraisal and Counterparty Limit Proposal Document for a local Pakistani bank is also included in the course. This document presents the results of bank analysis, peer group analysis and sovereign analysis; capital adequacy ratios and other financial statement analysis results, statistics and commentary; a section on the bank’s profile, shareholding and management structure, business plans and media coverage; an analysis of published credit ratings for the institution as well as the sovereign as well as a look at socio-political and macro-economic indicators; and a discussion of the key risks involved and a recommendation for the credit limit.
Learning Objectives
After taking this course you will be able to:
- List the core principles behind setting limits
- Describe the limit monitoring, control and review process
- List and describe the various categories of limits
- Define limit exceptions
- Calculate capital loss and stop loss limits
- Calculate VaR limits
- Calculate regulatory approach limits using a VaR based approach
- Calculate duration, convexity & PVBP limits
- Calculate pre-settlement risk limits for an FX forward contract and futures contracts
- Define various counterparty, liquidity and interest rate risk limits
- Apply specific limits to products
- Describe exception handling
- Create an action plan for limit monitoring and review
- Calculate VaR using the Variance Covariance and Historical Simulation approaches
- Prepare and present a credit appraisal and counterparty limit proposal document
Prerequisites
Familiarity with basic mathematics, statistics, probability and EXCEL, asset markets, portfolio management, financial statements, credit process, limit setting and capital adequacy regulation.
Target Audience
The course is targeted towards intermediate users and is aimed primarily at individuals responsible for credit appraisal, limit setting, credit risk management & capital allocation within banks, insurance companies, mutual funds, as well as finance departments of non-financial organizations.