Treasury Risk Management

Course Overview The effectiveness of the Treasury function in managing risk is crucial to the sound management of an organization. This became very clear during the credit crunch when a number of assumptions about behavioural risk factors were found to have been seriously underestimated, and in some cases resulted in the demise of the organisation. This course will provide a broad understanding of the role of the treasury function in managing risk, from the point of view of both corporate and bank treasuries, and also give the non treasury business manager insight into the role treasury can play in managing risk and supporting business development. The course is designed to develop delegates’ ability to recognise and assess the range of financial risks which can arise from its business activity, and provide an understanding of the risk management framework required for effective risk management, as well as covering the practical issues encountered in execution. Methodology Key points will be supported with practical examples and/or case studies at each stage of the course, and illustrated with examples and discussion of how things can go wrong Case Studies and Exercises The case studies and exercises will include some maths but will avoid complex formulae. A calculator may be useful but examples will be geared towards understanding the risk rather than crunching numbers. Attend this intensive and highly practical 4–day training course and learn about: The role of treasury in risk management How to assess the market risk arising from business activity and key issues to consider in determining hedging strategies The most widely used financial products available to hedge market risk, the risks associated with these tools and other approaches to risk mitigation at a practical level Liquidity risk, how to measure it and strategies for managing it The link between risk and capital management The principles of Funds Transfer Pricing and its role in risk management and the appropriate pricing of customer products
Day 1 Introduction Overview Role and objective of treasury Key activities - Liquidity and funding - Capital planning and management - Market risk management Treasury’s role in risk management Treasury organisation design Market Risk – Sources of Risk Assessing risks arising from the business - Types of market risk – FX, interest rate, commodity price Measurement and reporting Hedging strategy and policy Case Study: Sources of risk and potential hedging strategies in a mining company Other considerations in hedging strategy Managing Market Risk Hedging tools Key features of the main derivatives hedging products - Forwards - Futures - Swaps - Options Practical illustrations for hedging - FX risk - Commodity price risk - Interest rate risk Case Study: Hedging interest rate risk with swaps versus futures Day 2 Managing Market Risk (continued) Hedging costs Non-hedgeable risk Risks from overhedging Exercise: Hedging foreign currency income or expenses Other hedging tools Hedge effectiveness; accounting impact Hedging versus trading Risks arising from hedging activities – credit risk, basis risk, liquidity risk Risk mitigants Market risk management framework - Risk appetite and policy - Discussion of typical limit structures - Trader mandates - Stress testing Liquidity Risk Definition Corporate and bank perspectives Liquidity risk arising from business activity Liquidity risk arising from treasury activity - Funding - Investment - Hedging Customer/counterparty behavioural impacts Risk measurement and reporting Exercise: Liquidity stress Day 3 Liquidity Risk (continued) Liquidity risk management framework - Risk appetite and policy - Contingent funding plan - Discussion of alternative limit structures - Stress testing Case Study: Profile of a bank run Key risk mitigants Deconstructing Risk Exercises:application of learning to date to deconstruct the risk of a number of scenarios, and devise hedging or other risk mitigation strategies Funds Transfer Pricing Purpose and objectives Basic principles Interest rate risk Liquidity risk Discussion: examples of practical difficulties Other issues Implementation New product pricing Exercise: Designing FTP Day 4 Overview of capital management Definition and role of capital Overview of capital instruments Corporate and bank perspectives Bank regulatory capital environment Case study: Solvency risk versus liquidity risk Key drivers of bank capital requirements – implications for bank and corporate treasury functions Economic capital Quantitative measures/risk analysis Recap of DCF and basic financial maths Use in pricing and valuation Sensitivity analysis (Pv01, first and second orders) Exercise: Application to a simple money market portfolio Use in risk measures such as VaR Stress testing ALM risk measures Models versus common sense Course summary and close