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QUANTITATIVE RISK MANAGEMENT

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Quantitative risk management

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Academic year 2023/2024

Course ID
SEM0088
Teachers
Luca Regis (Lecturer)
Fabio De Luca (Lecturer)
Degree course
Finance
Insurance and Statistics
Year
2nd year
Teaching period
Second semester
Type
Related or integrative
Credits/Recognition
6
Course disciplinary sector (SSD)
SECS-S/06 - mathematical methods of economy, finance and actuarial sciences
Delivery
Formal authority
Language
English
Attendance
Optional
Type of examination
Written
Prerequisites
Math for Finance, Additional IT training, Numerical and statistical methods, Derivatives and Fixed-income.
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Sommario del corso

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Course objectives

  The course introduces the main tools for assessing market, credit and counterparty risk in accordance to the current regulation framework. Prudent valuation principles and practice are also discussed. A special focus will be given to the necessary instruments used by Investment Bank Risk Manager during ordinary and extraordinary activities in the typically Market Risk Department to measure and understand the market risks associated to investments and trading positions. Being the course  operationally oriented, attendance is strongly suggested.

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Results of learning outcomes

 

 At the end of the course, the student is expected to be able to:

-          understand the current regulation framework on market, credit and counterparty risk

-          calculate the market risk measures for complex portfolios, including equities, equity derivatives and bonds: this calculation will be performed  automatically implementing VBA code within Microsoft Excel

-          create a pricing library to price the plain vanilla options and to calculate the principal measurements of sensitivity (Delta, Gamma, Vega, Rho, Theta)

-          automatically manage the Market Data downloading for each individual risk factor present in the portfolio, re-evaluate the portfolio under each scenario and calculate the market risk using the VaR measure

-          check the VaR model effectiveness implemented using Backtesting

-          implement some EBA StressTest scenarios to applied to the complex portfolio, of increasing importance after the recent financial crisis

-          estimate default probabilities, loss given default and exposure at default

-          compute the probability distribution of portfolio losses  by the Vasicek model

-          compute the bilateral CVA/DVA of simple financial instruments

-          compute the Additional Valuation Adjustments (AVAs) of simple financial instruments

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Program

The course is divided into three parts:

Part 1 [24 hours]: Market risk (De Luca)

-          Introduction to VBA / Excel Programming

-          Implementation of pricing functions in VBA (plain vanilla options, futures, etc.) with relative Greeks.

-          Recap of Basel Accords with specific focus on Market Risk topics

-          VaR calculation in historical simulation (Time series management and P&L strip calculation).

-          Backtesting

-          Stresstesting

-          Introduction to Expected Shortfall  (Fundamental Review of the Trading Book)

Part 2 [24 hours]: Credit and counterparty risk (Regis)

-          Recap of Basel Accords with specific focus on Credit Risk topics

-          Estimating default probabilities

-          Correlation and copulas

-          Credit value at risk

-          Counterparty credit risk

 

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Course delivery

Lectures and lab sessions. Activities, according to the university dispositions, will be in presence.

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Learning assessment methods

The exam consists of homeworks and a coursework, followed by an oral exam.  Homeworks and the coursework will have three parts, which are graded as follows: 50% on part 1, 50% on part 2. 

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Support activities

Compulsory homeworks will be assigned. Deadlines will be posted on Moodle.

Suggested readings and bibliography

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Material and lecture notes will be posted on Moodle.

 

The following are the suggested readings for the course:

Part 1

-          Benninga, S. (2008). Financial modelling (fourth edition), McGraw-Hill.

-          Hull, J. and Basu, S. (2016). Options, futures and other derivatives, Pearson.

-          Staunton, M., and Jackson, M. (2001). Advanced modelling in finance using Excel and VBA, Wiley.

Part 2

-          Roncalli, T. (in press). Risk Management & Financial Regulation.

-          Gregory, J. (2015). The xVA Challenge: Counterparty Credit Risk, Funding, Collateral, and Capital, Wiley.

 

Other references:

-          Brigo, D., Morini, M., Pallavicini, A. (2013). Counterparty Credit Risk, Collateral and Funding: With Pricing Cases For All Asset Classes, Wiley.

-          Brigo, D., Pallavicini, A., Torresetti, R. (2010). Credit Models and the Crisis: A Journey into CDOs, Copulas, Correlations and Dynamic Models, Wiley.

-          Resti, A., and Sironi, A. (2007). Risk Management and Shareholders' Value in Banking, Wiley.

-          Walkenbach, J. (2013). Excel 2013 Power Programming with VBA, Wiley.



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Class scheduleV

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