Quantitative Finance and Insurance

Math for Finance, Additional IT training, Numerical and statistical methods, Derivatives and Fixed-income.

  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.

 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

Lectures and lab sessions.

The exam consists of homeworks and a group coursework, followed by an oral exam.  Homeworks and the coursework will have three parts, which are graded as follows: 50% on part 1, 35% on part 2 and 15% on part 3. Students taking the exam on the first session are granted a bonus of 3 extra-points.

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

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 [16 hours]: Credit and counterparty risk (Marena)

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

-          Estimating default probabilities

-          Correlation and copulas

-          Credit value at risk

-          Counterparty risk

Part 3 [8 hours]: Prudent valuation (Bianchetti)

-          Regulatory requirements

-          Theoretical background

-          AVA calculations under the simplified approach

-          AVA calculations under the core approach

-          Practical examples

 

 Material and lecture notes will be posted on Moodle.

The following are the required textbooks 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

-          Hull, J. (2015). Risk Management and Financial Institutions, Wiley.

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

Part 3

-          Bianchetti, M., and Cherubini, U. (March 1, 2016). Prudent Valuation Guidelines and Sound Practices. Available at SSRN: https://ssrn.com/abstract=2790629

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.

-          Professional Risk Managers' Handbook 2015 Edition, Volume III: Book 2 Credit Risk and Counterparty Credit Risk.

 

Students who cannot attend classes are kindly requested to contact instructors at the beginning of the course.

il corso sarà offerto dall'a.a. 2018/2019.