Advanced Treasury Risk Management

A 5-day intensive programme that provides a detailed examination of the strategic and tactical roles of the Treasury function. This course deepens understanding of the necessary financial skills, as well as building the necessary strategic management skills for senior treasury risk management roles. The role and responsibilities of treasury risk managers Treasury products: Short term cash management and money market instruments Developing funding and investment strategy Balance sheet and liquidity risk management strategy Currency risk exposure measurement and management Techniques for measuring and managing interest rate risk Strategies for managing short term and long term interest rate exposures Using interest rate and FX derivatives in funding and liquidity risk management Derivatives pricing and risk characteristics Development of treasury risk management strategy Who should attend Treasury managers Risk managers and controllers FX and money market sales and traders Client relationship managers Corporate treasury personnel Asset-Liability managers, ALCO professionals Derivatives sales and structurers Treasury operations managers Auditors Course Background The role of the Treasury function within either a corporate treasury department or that of a financial institution is of primary significance, encompassing responsibilities of both tactical and strategic importance. Central within these responsibilities lies the management of financial risks that arise from many of the Treasury function’s activities, market risk exposures, balance sheet and liquidity risk management – dimensions that have assumed even greater significance in the aftermath of the global financial crisis. The objectives of this 5-day programme are to deepen delegates’ financial skills and knowledge of the nature of the activities, responsibilities and products within treasury management, as well as to develop a deeper understanding of the strategic role of treasury risk management within the organisation as a whole. Methodology This programme is highly practical and “hands on” in the techniques and methods of delivery. Training encompasses classroom based teaching, group discussions, in addition to workshops, case studies and exercises drawn from real life examples, across the entire spectrum of treasury instruments, risk management products and strategy developed over the course of the programme’s duration. Whilst within the programme content some concepts and techniques are based on complex quantitative modelling processes, attendance does not require advanced mathematical understanding, although delegates should possess basic mathematical fluency, as well as an awareness of the structure of financial markets and the main classes
Day 1 Treasury Risk Management and the Role of Treasury Fundamentals of Financial Markets The role of banks within financial markets. Commercial banks and the wholesale banking markets. The structure of the wholesale money markets and capital markets. Domestic and International money markets. Benchmark money market interest rates (LIBOR, Fed Funds etc.) Market participants and their roles within financial markets. Balance sheet management and the role of treasury within the money markets. The regulatory framework – capital and liquidity requirements. The Role and Organisation of Treasury The roles and responsibilities of the treasury function. - Funding and investment strategy. - Balance sheet management. - Asset liability management (ALM). - Liquidity risk management. - Market risk management. Current trends – changes in the strategic role of treasury. -Impact of regulatory capital requirements on treasury strategy. Objectives and organisation of the treasury function. - Maximisation of shareholder value. - Risk management policy, reporting and control. Funds transfer pricing. - Transfer pricing objectives: - Product pricing. - The central role of Treasury in fund transfer pricing (FTP). - Application of interest rate and FX derivatives in transfer pricing. Treasury Risk Management Overview of risks within the treasury function. Market risks. Operational risks. Liquidity risk. Counterparty credit risk exposure. Development of risk management policies and systems. Risk measurement and management policies. Principles for establishing enterprise risk management frameworks. Liquidity Risk Management Understanding the nature of liquidity risk Cash liquidity and market liquidity risks Metrics for measuring liquidity risk Stress testing Essential Maths for Finance Interest rates and the time value of money. Simple and compound interest conventions. Interest calculations and payment conventions. Present value and future value concepts. Discount factors and zero coupon rates. Valuation of financial instruments using discounted cash flow analysis. Application of financial math to valuation of fixed income instruments and derivatives. Price and yield (YTM) calculations. Interest rate risk sensitivity: Calculation of DV01 sensitivities. Day 2 Managing Interest Rate Risk Exposure in Treasury Money Market Instruments Domestic and international money markets. The interbank money markets; overnight and term deposits. Money market reference indices: EONIA, Fed Funds, LIBOR. Money market securities. Risk and return characteristics of different money market instruments. Money Market Risk Management The role of treasury within the money markets: Short term funding and investment. Funding, investment and cash liquidity risk management. Managing and maximising Net Interest Income (NII). Money market asset liability management. Gap analysis of assets and liabilities. Setting appropriate metrics for liquidity risk measurement. Intraday liquidity risk management in the money markets. Treasury Risk Management - Interest Rate and Liquidity Risk Analysis Interest rate risk analysis of short term assets and liabilities. Types of interest rate risk: Directional interest rate risk, curve risk, basis risks. Measurement of interest rate risk exposure: - Duration, DV01 and related measures - Stress testing Liquidity risk analysis. Cash flow forecasting and gap analysis. Determining the appropriate parameters for liquidity gap analysis. Optimising liquidity, Net Interest Income within regulatory requirements. Managing Short Term Interest Rate Risk - Money Market Interest Rate Derivatives Introduction to derivative markets and instruments. The role of derivatives in risk management. OTC and exchange traded derivatives. Interest Rate Forwards: Forward Rate Agreements (FRAs) Contract definitions and operational mechanics. Market conventions: price quotation and settlement. Pricing and valuation of FRAs: theory and practice. Short term Interest Rate Futures – Eurodollar/Euribor Futures Margin collateral management. Applications of futures and FRAs in interest rate risk management. Overnight Index Swaps (OIS) Operational mechanics of overnight index swaps. Settlement mechanics and payment calculations. Overnight index swap markets and indices (Fed Funds, EONIA etc.) Applications of OIS in interest rate and liquidity risk management. Basis Swaps Tenor basis swaps. Alternative reference indices (CP, Prime, Fed Funds etc.) Applications of basis swaps in interest rate and gap risk management. Day 3 Managing FX Exposure and Liquidity Risk Management Currency Risk Exposure Management Currency exposure – Types and sources of currency risk. - Transaction (cash flow receivables and payables) and Translation (balance sheet) exposures. - Economic exposure. - Liquidity risk exposures. - Contingent and forecast currency exposures. - Timing mis-match (Gap) exposures. The role of treasury in currency exposure management. - Exposure management policy and objectives. - Establishing and monitoring of risk limits. - Centralised and de-centralised models: Netting centres. - Hedging objectives and horizons. Managing Currency Risk - Currency Derivatives Forward Foreign Exchange - Outright Forwards and FX Swaps Pricing using interest rate differentials Quotation, trading and settlement conventions Forward FX risks - Market risks: Spot and interest rate risks - Counterparty risk (Pre-settlement and settlement risks) - Continuous linked settlement (CLS) Non-deliverable forwards (NDFs) - Applications of NDFs in Emerging Market currencies Practical Application of Currency Derivatives in FX and Liquidity Risk Management Hedging currency risk exposures with outright forward FX. Hedging translation risk – practical challenges. Funding (‘rolling’) spot positions forward. Hedging outright forward FX. Using FX swaps in funding and liquidity risk management. Interest Rate and Currency Options Introduction to options; fundamental properties and risk characteristics. Understanding and interpreting pay-off profiles. Interest rate options: - Caps/floors and swap options. Currency options. Market risk characteristics of options (the ‘Greeks’). Applying Options in Treasury Risk Management Strategy Using FX options to optimise management of currency risk exposure. Using interest rate options as alternatives to swaps and forward-based hedges. Constructing simple and structured hedges with options. Costs and benefits of options versus outright (forward, swap-based) hedging strategies. Applications of options in managing forecast and contingent exposures. Option strategies and the role of the treasury function. Setting and monitoring appropriate risk limits. Day 4 Long Term Funding and Liquidity Risk Management Long term funding and Liquidity Strategy Capital structure and long term funding strategy. The role for Treasury in strategic funding and asset – liability management. Sources of medium term and long term capital. Impact of regulatory requirements on long-term asset – liability management for banks. Measuring Interest Rate Risk Traditional approach: Maturity banding and gap analysis. Shortcomings of gap analysis. Duration (Delta) analysis. - Duration/DV01 analysis of assets and liabilities. Portfolio Approach. Bucketing interest rate risk into maturity bands. Calculation of grid-point sensitivities (Delta Vectors). Tools for Managing Long-term Interest Rate Risk Bond Futures. - Bond futures contract types and specifications. - Hedging interest rate risk with bond futures; calculating hedge ratios. - Basis risks in hedging with bond futures. Interest Rate and Currency Swaps. - Swaps market quotation and settlement conventions. - Structured and off-market swaps. - Swap yield curve modelling. Application of Interest Rate and Currency Swaps in Funding and Interest Rate Risk Management Applications of interest rate and currency swaps in ALM - Hedging fixed and floating interest rate assets and liabilities. - Creating ‘synthetic’ assets and liabilities. - Using interest rate and currency swaps to exploit funding arbitrage opportunities and diversify long term funding sources. Day 5 Market Risk Management and Treasury Trading Simulation Market Risk Management – Value at Risk Introduction to statistical methods of risk measurement – Value at Risk. Calculating firm-wide VaR – parametric and simulation based techniques. Selecting statistical and other parameters in VaR calculation. Advantages and shortcomings of different VaR methodologies. Modelling assumptions and constraints in Value at Risk models. Back-testing and stress testing; an essential complement to VaR. Using VaR as a firm-wide market risk management and control tool. The role of VaR in capital allocation and performance measurement (RAROC). VaR based risk reporting; setting and monitoring VaR based risk limits. Practical challenges in VaR implementation. Regulatory capital requirements and VaR: What went wrong during the financial crisis with VaR? Understanding the limitations of Value at Risk and the need for complementary measures. Course Summary and Close