Market and Liquidity Risk Management by Jawwad Ahmed Farid PDF
Market and Liquidity Risk Management by Jawwad Ahmed Farid PDF
Market and Liquidity Risk Management by Jawwad Ahmed Farid PDF
Management
Jawwad Farid
alchemya.com
FinanceTrainingCourse.com
jawwad@alchemya.com
Agenda
Introductions
Challenges
Market Risk
Questions
Wrap up
Jawwad Intro
3
Models at work
Market Risk
2014
Risk is hot.
Risk models are
2007
hot. Pricing models rule.
1996-
2000
Top Questions
What drives the
Why is risk distrust towards
broken? risk in board
rooms?
What can we do to
fix it?
Why is risk broken?
Real World
Governance
Models
Single Tracking
Source Data Volatility
Econom ic
Capital
Depositors,
Counterparties, Distribution of Portfolio Value
Critical Expected
Barrier Value
Em ergency Norm al
Managem ent Operating
Rating Agencies
Conditions Conditions
Frequency
Econom ic
Capital
Correlations
Distribution & Correlations
Correlations
The right blend - correlations
Crude Oil Blends - Prices
120
105
90
75
Brent Abu Dhabi- Murban Dubai- Fateh Iran-Heavy Saudi Arabia- Light
Correlation Abu Dhabi- Murban with Brent
1.00
0.60
0.20
(0.20)
(0.60)
(1.00)
0.60
0.20
(0.20)
(0.60)
(1.00)
Thought experiments- Two
FinanceTrainingCourse.com
24
Interest Rates - Volatility
12%
8%
4%
0%
15/03/2008 08/07/2008 31/10/2008 23/02/2009 18/06/2009
7 Days 14 Days 1 Month 3 Months
FX Rates - most
AUD-JPY Sterling-JPY USD-AUD EUR-JPY
3.6%
2.8%
2.0%
1.2%
0.4%
13/03/08 09/06/08 05/09/08 02/12/08 28/02/09 27/05/09
FX Rates - least
USD-JPY USD-EUR Sterling-EUR EUR-CHF
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
0.2%
13/03/08 09/06/08 05/09/08 02/12/08 28/02/09 27/05/09
FX Rates Volatility – Emerging
Markets
2.4%
1.6%
0.8%
0.0%
19/03/2003 29/03/2004 09/04/2005 20/04/2006 01/05/2007 11/05/2008 22/05/2009
0.1
0.1
0.1
0.1
0.0
0.0
0.0
0.0
-
5-Jan-04 5-Jan-05 5-Jan-06 5-Jan-07 5-Jan-08 5-Jan-09 5-Jan-10 5-Jan-11 5-Jan-12
Marginal
Exposure Trend Capital
Impact
Connections
Products Limits
Price
Volatility
Models
Relative Value
Relative Value - II
40
Transaction & Exposure Limits
Within a Trade • Max Ticket size
Sensitivity Limit
limits Management
Exposure Counterparty
Limits Limits
Transaction
Limits
Governance
Reporting
Business Risk
Lines
Looking up,
Conflicts
at or down?
Products & Payoffs
Limits
Reconciliation
Approaching volatility
Monthly Crude Oil Change
Crude oil price changes - daily
250 120.00%
100.00%
200
80.00%
150
60.00%
100
40.00%
50
20.00%
0 0.00%
Frequency Cumulative %
Volatility - Distribution
Gold
Oil
Silver
EUR-USD
More Thought experiments
FinanceTrainingCourse.com
Model price vs. Market price vs.
liquidity
FinanceTrainingCourse.com
Swap Points - A
Swap Points - B
Swap Points - C
Swap Points - D
Swap Points - E
Four relationships
(1 rlocal) /(1 r $) E(1 ilocal) / E(1 i$)
( forwardlocal / $) /(Spotlocal / $)
Forward &
E(Spotlocal / $) /(Spotlocal / $)
Expected change in
Spot spot rates
Differential
Thought Experiement
Is Gold safe now?
Is Gold safe now?
Bubble and after
What is Risk?
Marginal Capital /
Exposure Trend
Impact Appetite
Exposure
2,000
1,500
1,000
500
0
300
250
200
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12
February March April May June
Exposure, Risk, Target Accounts
Volatile
Financial
Uncertain
Impact
Exposure
What is a Target Account?
P&L
Risk &
Capital
Benchmark
Governance revisited
Governance challenges
Who is the regulator?
• Broadest definition.
Morality • How do you teach morality to smart people?
The Gambit – Rational thinking
• Recognition
Personal Costs • The desire to get caught
Collusion
• FSA Libor Crisis, FX
Exchange rate crisis
• 11 years, 4 Markets
alchemya.com
FinanceTrainingCourse.com
jawwad@alchemya.com