At this course, we shall present and discuss the state of the art techniques of measuring and managing market, credit, liquidity and operational risks. We shall start with an overview of financial risk and we shall explain how and why these risk have become more integrated. We shall then take at look at the current regulatory framework and point to its limitations. We shall also take a closer look at the proposal for a new Basle Accord, scheduled for implementation by 2004. We shall explain the major revisions and discuss their possible consequences for financial risk management. We shall then present a coherent framework for measuring market, credit risk and operational risk. First, we explain how market risk can be measured and managed at the instrument, portfolio and "enterprise" levels. We explain how "Value at Risk" is measured for linear as well as non-linear positions, using "parametric" and simulation approaches. We also introduce the concept of "Extreme VaR", and we demonstrate how "stress testing" can be used to identify potential trouble spots. Further, we explain and demonstrate how market risk can be mitigated using futures, options, swaps and other derivate instruments. We then turn to credit risk, explaining how the various types of credit risk can be measured and managed - and how they integrate with other risks. Further, we explain how credit risk can be mitigated, i.a. using credit derivatives. On day three, we take a look at operational risk, explaining why this type of risk has become more important and how it should be measured at the enterprise level. We also explain how a coherent framework for measuring risk performance (RAROC) and for allocating capital across business units can be established. We propose a set of risk management policies appropriate for managing risks under stress conditions, and we present a sample IT strategy for risk management. Finally, we give an overview of the new international accounting standards laid down in FAS133/IAS 39 and discuss their possible implications for risk management.
