aci book alm
TRANSCRIPT
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Contents
Foreword
Chapter 1
Responsibilities of Banks and Overview of Banking Risks 13
1.1 Banking activities and the Banks Balance Sheet 13
1.1.1 The process of money creation 14
1.1.2 Commercial Banking, Investment Banking and the Treasury
Function 17
1.2 The items on a banks balance sheet 18
1.3 Overview of Banking risks 21
1.4 Regulatory Capital, Economic capital and RAROC 24
Chapter 2
Organization and Execution of Risk Management with Banks 25
2.1 The central risk management organization of a bank 25
2.1.1 Asset and Liability Management Committee 27
2.1.3 Market Risk Committee 29
2.1.4 Operational Risk Committee 29
2.2 The responsibilities of a banks nancial markets division 30
2.2.1 Cash management 30
2.2.2 Attracting funding 31
2.2.3 Execution of Foreign Exchange Risk Management 32
2.2.4 Execution of Interest Rate Risk Management 33
2.2.5 Proprietary Trading 33
2.2.6 Sales 33
2.2.7 Arranging Securities Issues 34
2.3 Limit control sheet 35
2.4 New product approval process 36
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Chapter 3
Overview of the Basel Accords 37
3.1 Basel I 37
3.2 Basel II 38
3.2.1 Capital Requirement for Credit Risk 39
3.2.2 Capital Requirement for Market Risk 40
3.2.3 Capital Requirement for Operational Risk 413.3 Basel III 41
3.3.1 General changes in solvency requirements 42
3.3.2 Leverage ratio 45
Chapter 4
Valuation of Linear Financial Instruments 47
4.1 Discount Factors 48
4.1.1 Future Value and Present Value with Single Interest
(Money Market) 48
4.1.2 Future Value and Present Value with Interim CouponPayments 49
4.2 Yields used for Discounting 50
4.2.1 Euribor and OIS Discounting 51
4.2.2 Zero-coupon rates 55
4.3 Implied Forward Rates 60
4.3.1 Short Term Implied Forward Rates for Periods that start within
one Year 61
4.3.2 Short-term Forward Rates for Periods that start after one Year 62
4.4 Example: The valuation of interest rate swaps 63
4.5 Modied duration 66
4.5.1 Calculation of the Modied Duration 68
4.5.2 Factors that determine the level of the modied duration 69
4.5.3 Convexity 69
4.5.4 The Modied duration of a oating rate note 70
4.5.5 The modied duration of an interest rate swap 72
Chapter 5
Valuation of options 75
5.1 Intrinsic value 75
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5.2 Time value 76
5.2.1 The eect of a change in the price of the underlying value on the
time value 78
5.2.2 The eect of a change in the remaining term on the time value 79
5.3 The Black-Scholes model 82
Chapter 6Market Risk for Single Trading Positions 85
6.1 Market Risk Sensitivity Indicators 85
6.1.1 Value of one point / pip 86
6.1.2 Basis Point Value 86
6.1.3 The Greeks 88
6.2 Value at Risk 92
6.3 Stress tests 93
6.4 Extreme value theory 94
6.5 Expected shortfall 96
6.6 Trading limits 96
6.6.1 Value at risk limit 976.6.2 Nominal limits 97
Chapter 7
Consolidated Market Risk 103
7.1 Full valuation method 103
7.2 Variance-covariance method 105
7.2.1 The standard normal probability distribution 106
7.2.2 The volatility of composed trading positions 107
7.2.3 The VaR of composed trading positions with the Variance-
Covariance Method 108
7.3 Monte Carlo analysis 109
7.4 Back tests 109
7.5 Reporting of Consolidated Market Risk 109
Chapter 8
Interest Rate Risk 111
8.1 Denition of interest rate risk 111
8.2 Interest Risk in the Banking Book and in the Trading Book 112
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8.3 Interest Rate Risk Measurement 114
8.3.1 Gap analysis / maturity method 114
8.3.2 The duration method 118
8.4 Hedge accounting 128
8.4.1 Fair value and amortized cost 128
8.4.2 The concept of hedge accounting 129
8.4.3 Fair value hedge 130
8.4.4 Cash ow hedge 1308.4.5 Net investment hedge 131
8.4.6 Hedge accounting in practice 131
Chapter 9
Liquidity Risk 133
9.1 Causes of liquidity risk 133
9.2 Sources of liquidity 136
9.4 Liquidity Risk Management 139
9.4.1 Signals of liquidity problems and responses 139
9.4.2 Liquidity Transfer Pricing 1409.5 Basel II Minimum global liquidity standards 143
9.5.1 Liquidity coverage ratio (LCR) - 2015 143
9.5.2 Net stable Funding ratio (NSFR) - 2018 146
Chapter 10
Settlement Risk and Counterparty Credit Risk 151
10.1 Types of Credit Risk 151
10.1.1 Debtor risk 151
10.1.2 Settlement risk or delivery risk 152
10.1.3 Replacement risk or pre-settlement risk 153
10.2 Factors that determine the amount of credit risk 154
10.3 Approach of the exposure at default for the use of the credit line, PFE 157
10.3.1 Add-on for potential future exposure 158
10.3.2 Concept of PFE 158
10.3.3 The PFE of an FX forward contract 161
10.3.4 The PFE of an IRS contract 162
10.4 Pricing counterparty risk: CVA and add-on for cost of capital 165
10.4.1 Marginal default probabilities 166
10.4.2 The expected exposure of an forward contract 168
10.4.3 The expected exposure of an IRS contract 171
10.4.4 Quick and dirty calculation of the CVA of an IRS 17410.4.5 Other CVA concepts 175
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10.5 Add-on for cost of capital 176
10.5.1 Current exposure method (CEM) 176
10.5.2 Standardized Method (SM) 178
10.5.3 Internal Models Method (IMM) 178
10.6 Impairment under IFRS 179
Chapter 11Credit Risk Risk Mitigating Measures 181
Introduction 181
11.1 Counterparty limits 181
11.2 Contractual netting / close-out netting 182
11.3 Collateral 183
11.4 Central counterparties 185
11.5 CLS 188
11.6 Credit Default Swap 192
11.7 Securitisation 193
Chapter 12
Consolidated Credit Risk 195
12.1 Standardized Approach 195
12.2 Internal Rate Based Approach 197
12.3 Economic Capital 198
Chapter 13
Operational Risk Management 201
Introduction 201
13.1 The cause-event-eect concept 201
13.2 Internal processes 203
13.2.1 Separation of duties 203
13.2.2 Internal controls 204
13.3 Human error 205
13.4 Computer systems 206
13.4.1 Condentiality 206
13.4.2 Integrity 206
13.4.3 Correctness 207
13.4.4 Availability 207
13.5 External factors 208
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13.6 Operational Risk Framework and Control Measures 208
13.6.1 ORM policy & organisation 209
13.6.2 Risk identication and assessment 210
13.6.3 Risk mitigation 213
13.6.4 Risk measurement 213
13.6.5 Incident management 214
13.7 Operational risk under the Basel rules 216