FRM工行总行培训材料1_Foundations_of_Risk_Management.pdf

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1、謝承熹 1Philippe Jorion,ValueatRisk:The New Benchmark for Managing Financial Risk,3rd Edition(New York:McGrawHill,2007).Chapter 1 The Need for Risk Management MAJOR SOURCES OF RISK-AIM 1:Define risk and describe some of the major sources of risk.AIM 2:Differentiate between business and financial risks

2、and give examples of each.-Risk is defined as the unexpected variability of asset prices and/or earning.There are two major of risk:business(企業風險)and financial.Business risk is the risk that a firm is subjected to during daily operations and includes the risks that result from business decisions and

3、 the business environments.Business risk includes strategy risk and macroeconomic risks.Financial risks are the results of a firms financial market activities.EXTREME MARKET MOVEMENTS-AIM 3:Relate significant market events of the past several decades to the growth of the risk management industry.-Th

4、e recent growth of the risk management industry can be traced directly to the increased volatility of financial markets since the early 1970s.Examples of extreme market events include:1971:Fixed exchange rate system broke down.1973:Shocks to price of oil,high inflation,and volatile interest rates.19

5、87:Black Monday.1989:Japanese stock market bubble deflated.1997:Russia debt default and the collapse of the Long-Term Capital Management hedge fund.2001:The September 11 attacks on the World Trade Center and Pentagon set in motion the 2001 U.S.equity market collapse.2007-present:Credit crisis result

6、ing from mortgage market meltdown and huge amounts of bank leverage.謝承熹 2Firm have recently become more exposed to economic and financial variables.Two major factors have led to increases in the sensitivity to these financial factors:Deregulation in banks led to increases in interest rate sensitivit

7、y.Globalization causes firms to have more exposure to currency changes.Appropriate use of financial risk management tools serve to provide protection again potential future losses.FUNCTIONS AND PURPOSES OF FINANCIAL INSTITUTIONS-AIM 4:Describe the functions and purposes of financial institutions as

8、they relate to financial risk management.-Financial institutions serve as financial intermediaries for managing financial risk.Financial institutions create markets and instruments to share and hedge risks,provide risk advisory services,and act as counterparty by assuming the risk of others.Financia

9、l institutions and markets,unfortunately,cannot protect against all risk as some risks remain difficult to hedge.For example,the risk that arises from government interference in credit markets or foreign exchange markets.DERIVATIVES-AIM 5:Define what a derivative contract is and how it differs from

10、a security.-A derivative contract is a contract that derives its value from an underlying security.Derivatives have a predefined life,a predefined reference rate or price,and a predefined notional amount.Derivatives are not issued to raise capital and are considered as zero-sum games.Securities are

11、issued to raise capital in order to support projects that will earn a return greater than the cost of those securities.They are considered as non-zero sum games.謝承熹 3Leverage allows derivatives to be useful as hedging instruments due to their low transaction costs and limited initial cash outlay.How

12、ever,as leverage increases,the variability of return increases.FINANCIAL RISK MANAGEMENT-AIM 6:Define financial risk management.-Financial risk management is the process of detecting,assessing,and managing financial risks.VALUE AT RISK-AIM 7:Define value-at-risk(VaR)and describe how it is used in ri

13、sk management.-Value at Risk(VaR)is defined as the maximum loss over a defined period of time at a stated level of confidence,given normal market condition.For this distribution,the value associated with a 95%confidence level is a return of 15.5%.If you have$1,000,000 invested in this security,the o

14、ne month VaR is$155,000.謝承熹 4Other Risk Management Tools-AIM 8:Describe the advantages and disadvantages of VaR relative to other risk management tools such as stop-loss limits,notional limits,and exposure limits.-A stop-loss limit(停損上限)seeks to limit the amount of loss on a position by eliminating

15、the position after a cumulative loss threshold has been exceeded.It is a control mechanism that functions ex-post.It is easy to calculate,easy to explain,and can be aggregated across assets(i.e.,it allows for risk to be measured across an entire portfolio/institution).A notional limit(名目本上限)is a lim

16、it on the notional amount invested in a position or asset.However,for the same notion amount,some positions have extreme risks and others no risk.It fails to explain the risk of a position to changes in risk factors.It is easy to calculate and explain,but cannot be aggregated across assets.Exposure

17、limits(曝險上限)are limit to risk factor exposures.For interest rates,equity markets,and options,the applicable exposure is duration,beta,and delta respectively.It fails to quantify the volatility of the risk factors and the correlations between risk factors.It is difficult to calculate,difficult to exp

18、lain,and cannot be combined across assets.VaR is an ex-ante measure and can at times be difficult to calculate.It captures exposures to risk factors and accounts for variation and covariation in risk factor.It is comparable across different business units in a firm with different assets and risk cha

19、racteristics.It is also frequently used in the risk budgeting process,where upper management allocates a risk level to each asset class.However,all methods for calculating VaR first require accurate inputs,and this issue becomes more and more daunting as the number of assets in a portfolio gets larg

20、er.謝承熹 5 Valuation and Risk Management Using VaR-AIM 9:Compare and contrast valuation and risk management,using VaR as an example.-Valuation is the process of discounting the expected future value of an asset to determine the current price of the asset.The expected value for an asset is the mean val

21、ue for the distribution of possible values.VaR focuses on the lower tail of the return distribution.VaR looks at the future value of as asset,not the present value,and utilizes the distribution of returns that is often assumed to be equivalent to the historical distribution.Less precision is require

22、d in VaR analysis than in valuation.謝承熹 6TYPES OF RISK-AIM 10:Define and describe the four major types of financial risks:market,liquidity,credit,and operational;and their forms.-Market risk is the risk of losses owing to movements in the level or volatility of market prices.Absolute risk focuses on

23、 the volatility of total return.Relative risk is referred to as tracking error since it is usually measured relative to a benchmark index or portfolio.Directional risks involve linear risk exposures to the direction of movements in financial variables.Non-directional risks involve the remaining risk

24、s and have non-linear exposures in economic or financial variables.Basis risk is the risk the price of a hedging instrument and the price of asset being hedged are not perfectly correlated.The risk of loss from changes in actual or implied volatility of markets prices is known as volatility risk.謝承熹

25、 7Liquidity Risk includes both asset-liquidity risk(資產動性風險)and funding liquidity risk(融資動性風險).Asset-liquidity risk,which is sometimes called market(or trading)liquidity risk,results from a large position size forcing transactions to influence the price of securities.To manage asset-liquidity risk,li

26、mits can be establishing on assets that are not heavily traded.Funding liquidity risk,which is sometimes called cash-flow risk,refers to the risk that a financial institution will be unable to raise the cash necessary to roll over its debt;to fulfill the cash,margin,or collateral requirements of cou

27、nterparties;or to meet capital withdrawals.Credit risk is the risk of losses owing to the fact that counterparties may be unwilling or unable to fulfill their contractual obligations.Its effect is measured by the cost of replacing cash flows if the other party defaults.This loss encompasses the expo

28、sure,or amount at risk,and the recovery rate,which is the proportion paid back to the lender.A credit event relates to a change in counterpartys ability to perform its previously agreed to financial obligations.Market prices incorporate changes to credit ratings or changes to default probabilities c

29、an be looked as both market risk and credit risk.Sovereign risk(主權風險)refers to the risks resulting from a countrys actions.A countrys willingness and ability to repay its obligations are often factors looked at when evaluating the sovereign risk.The sources of sovereign risk stem from a countrys pol

30、itical and legal systems.Settlement risk(清算風險)is the risk that counterparty will fail to deliver its obligation after the party has made its delivery.The exposure to counterparty default equals the full value of the payments due.In contrast,presettlement risk is lower than settlement risk because pa

31、yments will offset(i.e.,are netted).Operational risk is the risk of loss due to inadequate monitoring systems,management failure,defective controls,fraud,and/or human errors.Operational,market,and credit risk are interrelated.An operational failure may increase market and credit risks.For example,a

32、bank that engages in buying and selling derivatives without an adequate understanding of the derivatives market could suffer significant losses.Those losses could then result in a change in credit rating for the firm and a reduction in market price for its securities.謝承熹 8 Model risk is the risk of

33、loss due to the use of misspecified or misapplied models.People risk(人員風險)relate to the risk associated with fraud perpetrated by internal employees and/or external individual.An example of people risk is a rogue trader(交員)within an institution that intentionally falsifies related to losses incurred

34、.Legal risk is the risk of a loss in value due to legal issues including lawsuits,fines,penalties,and/or damages.Legal risks are inherent in doing business but can be controlled through corporate policies and procedures.謝承熹 9 謝承熹 10 謝承熹 11 謝承熹 12 謝承熹 13Edwin J.Elton,Martin J.Gruber,Stephen J.Brown a

35、nd William N.Goetzmann,Modern Portfolio Theory and Investment Analysis,8th Edition(Hoboken,NJ:John Wiley&Sons,2009).Chapter 5 Delineating Efficient Portfolios EXPECTED RETURN AND VOLATILITY OF A TWO-ASSET PORTFOLIO-AIM 1:Calculate the expected return and volatility of a portfolio of risky assets.-Th

36、e expected return on a portfolio is a weighted average of the expected returns on the individual assets that are included in the portfolio.For example,for a two-asset portfolio:The variance of a two-asset portfolio equals:The covariance is unbounded(ranges from negative infinity to positive infinity

37、).We often scale the covariance by the standard deviations of the two assets to derive the correlation coefficient:)/(212,12,1Cov.謝承熹 14 The portfolio standard deviation or portfolio volatility is the positive square root of the portfolio variance.THE PORTFOLIO POSSIBILITIES CURVE We can plot these

38、combinations on a graph with expected return on the y-axis and standard deviation on the x-axis,commonly referred to as plotting in risk/return“space”.謝承熹 15 The graph of the possible portfolio combinations is referred to as the portfolio possibilities curve.MINIMUM VARIANCE PORTFOLIO-AIM 4:Define t

39、he minimum variance portfolio.-The minimum variance portfolio is the portfolio with the smallest variance among all possible portfolios on a portfolio possibilities curve.Start with the expression for portfolio standard deviation:謝承熹 16 CORRELATION AND PORTFOLIO DIVERSIFICATION-AIM 2:Explain how cov

40、ariance and correlation affect the expected return and volatility of a portfolio of risky assets.-Perfect Positive Correlation In the case where two assets have perfect positive correlation,the portfolio standard deviation reduces to the simple weighted average of the individual standard deviation i

41、ndicating no diversification.謝承熹 17 Since expected portfolio return is a linear combination of the individual asset returns,and risk is a linear combination of the individual asset volatilities,the portfolio possibilities curve for two perfect correlated assets is a straight line.No diversification

42、is achieved if the correlation between assets equals+1.As the correlation between two assets decreases,however,the benefits of diversification increase.Perfect Negative Correlation The greatest diversification is achieved in the case where two assets have perfect negative correlation.When two assets

43、 have perfect negative correlation,it is possible to construct a portfolio with zero volatility by setting the standard deviation equal to zero and solving for the portfolio weights.)/(2121w,121ww.Given that the standard deviation reduced to two linear equations,the portfolio possibilities curve for

44、 two assets with perfect negative correlation will be two line segments.Zero Correlation When the correlation between two assets is zero,the standard deviation expression to a non-linear equation and the portfolio possibilities curve will be non-linear.Assume that the standard deviations of the indi

45、vidual assets are greater than zero,it is impossible to construct a portfolio with zero volatility.The weights of the minimum variance portfolio are)/(2221221w and 121ww.謝承熹 18Moderate Positive Correlation If we assume the two assets are moderately correlated(e.g.,5.0),then the portfolio standard de

46、viation reduces to Similar to the case of zero correlation,assets with moderate correlation have non-linear portfolio possibilities curves.謝承熹 19 THE SHAPE OF THE PORTFOLIO POSSIBILITIES CURVE-AIM 3:Describe the shape of the portfolio possibilities curve.-If we are not considering the special cases

47、where 1 or 1,the shape of the portfolio possibilities curve is best described in two pieces.The piece of the portfolio possibilities curve that lies above(below)the minimum variance portfolio is concave(convex).Another important aspect regarding the shape of the portfolio possibilities curve is that

48、 the curve must lie to the left of a line segment connecting any two points on the curve.Combinations of assets with lower correlation will always lie to the left of that line.謝承熹 20 THE EFFICIENT FRONTIER-AIM 5:Define the efficient frontier and describe the impact on it of various assumptions conce

49、rning short sales and borrowing.-The efficient frontier is a plot of the expected return and risk combinations of all efficient portfolios,all of which lie along the upper-left portion of the possible portfolio.Portfolio such as D and E are called efficient portfolios,which are portfolios that have

50、maximum expected return for all portfolios with the same risk.When allowing for short sales,the efficient expands up and to the right.Theoretically,with no limitations on shorting,it would be possible to construct a portfolio with infinite return.謝承熹 21 Combining the Risk-Free Rate with the Efficien