There are a number of challenges when it comes to communicating, enforcing and setting limits in a trade, treasury, portfolio and risk function. |
One big factor is the language of limits. When it comes to building consensus across Traders, Risk and Credit, it is like a tower of Babel. Traders speak and understand Stop loss, risk managers work and vouch for value at risk, credit officers track and live for PSR (Pre-Settlement). How do we link the three?
Our short “Setting Limits” video course picks up and builds up on the core concepts covered in two of our earlier courses, The Quant Crash Course and Calculating Value at Risk and introduces the linkage between Stop loss and Value at Risk by defining the median trading loss.
The median trading loss is the likely trading loss we expect to see every 2nd or 3rd trading day. We then link the median trading loss to a VaR confidence level that can be used for communicating results and suggesting limits to Board Risk Committees. To build the intuition for that conversation we introduce the concept of odds and highlight the interpretation problem Board members face when seeing extreme probabilities (the problem first highlighted and suggested by Nicholas Nassim Taleb).
In the final part of our course we switch our focus to PSR (Pre Settlement Risk) limits calculations. PSR limits are counterparty limits that calculate the worst case likely loss on account of default on settlement date by a given counterparty. Once again a VaR measure subject to changing volatilities, our approach highlights the usage of maximum, minimum and median volatilities and suggests that the underlying VaR estimates need to be reviewed more frequently than the once in 2 or 3 year practice we have observed in the region.
Course Prerequisites
Quant Crash Course video course
Calculating Value at Risk video course
Comfort with basic mathematics and EXCEL and an understanding of the risk management environment together with a familiarity of financial markets, banking industry, economic capital, portfolio management concepts and the Basel II framework.
Course Audience
This course is targeted at intermediate and advanced users and individuals responsible for capital allocations, limit setting and risk management with the treasury functions of banks and other financial institutions as well as finance departments of non-financial organizations.
Course Guide
Here is the structure of the course.
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Duration
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Session 1 – Setting Limits | 33:47 mins | ||