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Risk Management
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Types of financial risk
Equity Risk Trading Risk
Market Risk
Interest Rate Risk
Gap Risk
Currency Risk
Commodity Risk
Operational Risk
Regulatory Risk
Human Factor
Risk
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Understanding Market Risk
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Why the focus on Market Risk Management ?
• Convergence of Economies
• Easy and faster flow of information
• Skill Enhancement
• Increasing Market activity
Leading to
•Increased Volatility
•Need for measuring and managing
Market Risks
•Regulatory focus
•Profiting from Risk
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Best Practices
in
Market Risk Management
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1. Rethinking the Market Risk process
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2. Establish Top Management Oversight
Ensure that bank’s overall market risk exposure is maintained at prudent levels
and consistent with the available capital
Ensure that top management as well as individuals responsible for market risk
management possess sound expertise and knowledge to accomplish the risk
management function.
Ensure that the bank implements sound fundamental principles that facilitate the
identification, measurement, monitoring and control of market risk.
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3. Deploy Best practices framework
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4. Adopt appropriate Organisation Structure
Organization Structure
The structure should conform to the overall strategy and risk policy set
by the BOD
Those who take risk (front office) must know the organization’s risk
profile, products that they are allowed to trade, and the approved limits.
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5. Invest in Good Technology
Treasury
Integration
Straight -through
Processing
Back Office Market
Integration Integration
Equity Options
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7. Ensure Robust Marking to Market
The need arises due to structured products and lack of liquidity results in
the absence of traded prices
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8. Establish good operational processes
liquidity management
position keeping
limit management
risk management
settlement management
treasury accounting
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9. Measure, Monitor & Manage
– Value at Risk
ValueatRisk
ValueatRisk is a measure of Market Risk, which
Value at Risk
measures the maximum loss in the market value of
.022 433 a portfolio with a given confidence
.016 324.7
.000 0
For e.g.., a set of portfolio having a current value
1.5 2.9 4.3 5.6 7.0 of say Rs.100,000 can be described to have a
Certainty is 95.00% from 2.6 to +Infinity daily value at risk of Rs. 5000 at a 99%
confidence level, which means there is a 1/100
chance of the loss exceeding Rs. 5000/
considering no great paradigm shifts in the
underlying factors.
It is a probability of occurrence and hence is a
statistical measure of risk exposure
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Features of CRISIL VaR Model
Variance-
Portfolio
Stop Loss covariance
Optimization
Matrix
Helps
Facility
For
For
For
picking
in
Identifying
of
aiding
optimizing
Return
multiple
upinsecurities
Analysis
cutting
and
methods
portfolio
isolating
losses
which
forand
inaiding
Risky
during
the
portfolios
gelgiven
well
inand
volatile
trade-off
set
in
safe
inthe
of
single
securities
periods
constraints
portfolio
model
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Managing Market Risk
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10. Explore quantitative models
for default prediction
Derivation of Asset value & volatility The present coverage include listed & Crisil rated
Calculated from Equity Value , volatility for each companies
company-year
Solving for firm Asset Value & Asset Volatility
simultaneously from 2 eqns. relating it to equity value
and volatility
The product development work related to private
firm model & portfolio management model is in
Calculate Distance to Default
Calculate default point (Debt liabilities for given
process
horizon value)
Simulate the asset value and Volatility at horizon
The model is validated internally
Calculate Default probability (EDF)
Relating distance to default to actual default
experience CCoP is one of the most complicated product
Use QRM & Transition Matrix
developed and with the help of in-house technology.
Calculate Default probability based on Financials
Arrive at a combined measure of Default using both
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To Summarise….
No Risk … No Gain!
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for further details contact, . . .
D.Ravishankar
Director,
Investment & Risk Management Services
CRISIL
Email : dravishankar@crisil.com
Ph.no: 5653 7531
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