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Morning

1. The Role of Value-at-Risk in Modern Financial Management (Jauri)

• Why VAR? What is it?
• Currency and interest rate risk management issues
• Creating a corporate risk management policy and strategy
• The latest developments and applications of the VAR approach
• Why and when VAR should be included in your risk management toolkit
• Shareholder expectations
• New regulatory standards

2. Financial Toolkit for Risk Management (Giddy)

• The Yield Curve and Forward Interest Rates
• Links between Cash, FRAs, Futures, and Swaps
• Zero-coupon Bonds and Spot Rates for Valuation
• The Bootstrapping Method

3. Measuring Market Exposure: Interest Rates, Currencies, Equities, Commodities (Giddy)

• Measuring and predicting volatilities of currencies, interest rates, etc.
• The distributional properties of financial market prices: are they normal, lognormal, skewed, fat-tailed? Are volatilities and correlations stable?
• Measuring and tracking the risk exposure of individual market risk positions
• Allocating ("mapping") cash flows to zero-coupon equivalents
• Issues arising from position netting (currency correlations, parallel shift of the yield curve)
• Problem of the timing and uncertainty of anticipated operating cash flows

4. Using Volatilities and Correlations to Measure Overall Value at Risk (Giddy)

• Using modern portfolio theory to reduce risk and save hedging costs
• Adding up individual trading positions to give an overall picture of risk for the firm
• Using the correlation matrix
• Computing the overall position VAR in bonds, currencies, etc.
• Calculating a single measure of earnings at risk, daily, weekly or monthly
• Production and interpretation of a management-friendly risk report

Afternoon

5. Application of the Value-at-Risk Approach to Management of Corporate Foreign Exchange Risk (Giddy)

• Case study of a company with multi-currency cash flows
• How to summarize the company’s positions, by currency and maturity
• Downloading, manipulating and organizing market data (Internet, Datastream, etc)
• Using a computer spreadsheet program for position risk analysis
• Sensitivity and risk-reduction analysis
• Producing a risk-management report
• Using VAR for cross-hedging and to minimize hedging costs

6. Finnish Case Study

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Morning

7. Effective Risk Reporting, Performance Evaluation and Control (Giddy)

• Setting hedging goals in relation to risk using VAR
• Risk/return based performance evaluation
• A monthly VAR review cycle

8. Application of the Value-at-Risk Approach to Corporate Interest Rate Risk Management (Giddy)

• Case study of a company with fixed-floating funding in several currencies
• How to use the yield curve to set performance benchmarks
• Using a computer spreadsheet program for VAR-based funding cost analysis

9. The VAR of Options and Other Derivatives (Giddy)

• Linear vs non-linear exposure
• The delta approach
• The valuation-sensitivity approach
• The technique applied to vanilla and exotic options

10. Understanding and Managing Pitfalls, Problems and Limitations of the Value-at-Risk Approach (Jauri & Giddy)

• Key assumptions of the standard VAR method
• Loss of information in summary reports
• Instability of volatility and correlation estimates
• How to deal with discontinuous events such as EMS realignments
• Summary of alternative approaches

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Ian H. Giddy, Professor of Finance New York University • Stern School of Business 44 West 4th Street, New York 10012 Tel 212 998-0332 • Fax 212 995-4233

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Go to Giddy's Web Portal • Contact Ian Giddy at ian.giddy@nyu.edu