Fin-522 (28/4)

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1.4 Types of risk- 8t

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Market |credit |Liquidity| Operational| Legal & regulatory| business |strategic | reputation

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1.5 Risk management process

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Risk identification, risk measurement, finding mitigation tools, devising (উদ্ভাবন) risk mitigation strategies

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1.6 Risk management strategies

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Avoid, Transfer, Mitigate, Keep

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1.7 Practical process of managing risk-6

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Risk planning, Identify risks, qualitative analysis, semi-quantitative analysis, risk response plan, monitor & control

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1.8 Risk management with no data

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Deciding on what data to collect, identifying sources, collecting objective data, adjudicating between conflicting views, cleaning & Processing data, reaching consensus on data

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1.9 Collecting qualitative data- 10

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Documentation reviews, brainstroming, Delphi technique, interviews , root cause analysis, checklist analysis, assumption analysis, SWAT analysis, influence diagrams, cause and effect diagrams and process follows

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1.10 Formal modelling of project risks

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Probability matrix, impact matrix, risk matrix, expected monetary value (EMV)

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2.1 Steps to identify market risk

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Identification of risk factors | position maps | profit and loss distribution

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2.2 Factors that affect market risk -4F

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Interest rates, exchange rates, stock prices, commodity prices or inflation

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2.2 Changes in business value at four levels

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Assets, liabilities, Off balance sheet, Income statement

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2.3 When a business exposed to different market risk factors?

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Interest rate risk, equity risk, commodity price risk, exchange rate risk

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2.4 Tools of global risk map

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Position map, profit and loss distribution

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2.4 The risk measures that serves the purpose of position map

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Nominal position, market value, sensitivity to risk factors, equivalent portfolio

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2.5 Controlling market risk

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Definition of the limit structure (nominal position limits, equivalent position limits, capital at risk limits) | Limit monitoring

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2.6 Basic risk management strategies

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Speculative positions | hedges

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2.4 Global risk map | position map

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is a comprehensive visualization or representation of the various risk factors affecting the value of an entity's portfolio of financial products. | is a tool used to quantify the effect of various risk factors on the value of an entity's portfolio

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2.4(b) risk return measures

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value at risk |capital at risk| rorac -return on risk adjusted capital

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3.3 Steps in computing VaR

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Establishing a return distribution| Choosing the horizon and confidence level | mapping,| computing the VaR

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3.4 approaches for estimating volatility

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Short term conditional volatility estimation | exponentially weighted moving average EWMA model | generalized autoregressive conditional heteroscedastic GARCH model

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3.5 Different modes of computation for estimating VaR

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Paragmatic approach | Monte Carlo simulation | historical simulation

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4.1 Some credit risky securities

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Corporate debt securities, sovereign debt, Credit derivatives, Structured credit products

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4.1 How does credit risk impact the financial stability of a firm?

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Capital adequacy, funding cost, reputation damage, regulatory compliance, market perception

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4.3 Combined characteristics of equity and debt

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preferred stock, convertible bonds, payment in kind PIK Bond

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4.7 Transaction cost problems in credit contracts

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Asymmetric information | principle agent problems | risk shifting | moral hazard | adverse selection | externalities | collective action problem or coordination failures

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4.10 How to access creditworthiness

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Credit ratings and rating migration | internal ratings | Credit risk models (reduced form models,structural models, Factor Models)

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4.11 counterparty risk arises

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OTC derivatives trading | brokerage relationships

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4.12 types of Netting

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Bilateral netting | multilateral netting

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D.c.c Netting

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is a process used in derivatives trading to simplify obligations between parties by offsetting their contacts against each other

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4.12.b) mitigation of counter party risk

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understand the extent of exposure... continuously monitor and evaluate the creditworthiness... avoid concentration risk by diversifying counter parties... decrease exposure to specific counter parties... utilize CDS compression techniques to reduce redundant contracts...

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3.1 value at risk

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is a technique for analyzing portfolio market risk based on a known or at least posited return model. ... quantifies the maximum estimated loss of a Portfolio..

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3.2 two perimeters that the risk manager determines when computing VaR

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time Horizon | the confidence level

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E.a transaction liquidity funding liquidity

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transaction liquidity includes the ability to buy or sell an asset without moving its price.| funding liquidity refers to the ability to continuously finance assets at an acceptable borrowing rate.

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5.2 participants of collateral market

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Firms such as life insurance companies | hedge funds|other firms with excess cash

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5.2.a) forms of collateral markets

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Margin loans | Repurchase agreements | securities lending

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5.3 various risks associated with collateral market

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Market risk | credit risk | counterparty risk

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5.3.1. for managing risk associated with collateral market

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Diversification | collateral valuation and haircuts | risk monitoring and due diligence | use of derivatives | collateral agreements and legal protections

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5.4 different forms of derivatives

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Forward contract |futures contract | option contract | swap

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E.d why to employ leverage

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Magnifying returns | capital efficiency | opportunity exploitation | tax benefits | market expectations

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5.6 causes of transactions liquidity risk

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Cost of trade processing | inventory management by dealer | adverse selection | differences of opinion

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5.7 characteristics of market liquidity

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Tightness| depth |resiliency (স্থিতিস্থাপকতা)

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5.7.a Indicators or lack of liquidity

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Bid-ask spread | adverse price impact | slippage

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E.b.a Collateral market

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refers to the financial Marketplace where various types of Securities or other assets are used as collateral to secure loans of cash or other Securities.

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6.a risk management objective

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Reduce volatility of portfolio returns | diversification | Left-tail truncation |groping towards optimum | sizing of trades in accordance with the risk takers' goals | selection of risk factors ...

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6.b types of stress testing

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Historical stress tests | factor push - approach | predictive stress testing

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5.6.1 transaction liquidity risk

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..cost of searching for a counter party.. the market institution that assist in search... the cost of inducing someone to hold the position.

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2.4.1. Goal of Global risk map

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Quantifying each contribution to business Value

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5.1 types of liquidity risk

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Transaction, funding, systematic