In the complex world of global finance, derivatives play a crucial role in managing risk, but they also introduce a new layer of exposure: counterparty credit risk. This is the risk that the party on the other side of a derivative contract will default before the contract expires, leading to financial loss for the non-defaulting party. Understanding and effectively mitigating this risk is more critical than ever, especially in the wake of recent market volatility. This "Navigating Volatility" training course is meticulously designed to provide finance professionals with a comprehensive understanding of counterparty credit risk and the advanced tools and techniques required to manage it proactively.

This 10-day intensive program will delve into the theoretical underpinnings and practical applications of measuring and managing counterparty credit risk. You will learn about key concepts such as Exposure at Default (EAD), Potential Future Exposure (PFE), and Credit Valuation Adjustment (CVA). Through hands-on exercises and case studies, you will gain practical experience with industry-standard models and methodologies, equipping you to implement robust risk management frameworks within your organization. By the end of this course, you will be prepared to navigate the complexities of modern derivatives markets with confidence and expertise.

Duration: 10 days

Target Audience:

• Risk Managers and Analysts
• Treasury and Capital Markets Professionals
• Quants and Financial Engineers
• Portfolio Managers
• Internal and External Auditors
• Regulators
• Corporate Finance Professionals
• Students in Financial Engineering and Quantitative Finance
• Anyone involved in trading or managing derivative portfolios

Objectives:

• Understand the sources and types of counterparty credit risk
• Master the key metrics for measuring derivative exposure
• Learn to calculate Exposure at Default (EAD) and CVA
• Gain proficiency with simulation techniques like Monte Carlo
• Understand the role of collateral and netting agreements
• Analyze the impact of regulatory frameworks like Basel III
• Develop skills in building and validating risk models
• Gain insight into the operational challenges of risk management
• Learn to integrate credit risk into valuation and pricing
• Prepare for the challenges of managing credit risk in a dynamic market

Course Modules:

Module 1: Foundations of Counterparty Credit Risk

• What is counterparty credit risk?
• The difference between counterparty and traditional credit risk
• Key drivers of risk in derivative transactions
• An overview of the risk management lifecycle
• The importance of a comprehensive framework

Module 2: Derivative Instruments and Their Risks

• The basic mechanics of options, swaps, and futures
• Understanding the risk profile of each instrument
• How market movements affect exposure
• The concept of close-out netting
• The role of central clearing counterparties (CCPs)

Module 3: Measuring Exposure

• The difference between current and future exposure
• An introduction to Potential Future Exposure (PFE)
• Methods for calculating PFE (e.g., historical simulation, Monte Carlo)
• The role of wrong-way risk
• The importance of stress testing and scenario analysis

Module 4: Monte Carlo Simulation for Risk

• The principles of Monte Carlo simulation
• Designing a simulation for derivative portfolios
• Generating random variables for market factors
• The challenges of modeling correlated variables
• Best practices for running and interpreting simulations

Module 5: The Credit Valuation Adjustment (CVA)

• What is CVA and why is it important?
• The components of CVA: PFE and the counterparty's credit spread
• The challenges of pricing CVA in practice
• The role of wrong-way risk in CVA calculation
• The impact of hedging and risk mitigation

Module 6: Debit and Funding Valuation Adjustments (DVA, FVA)

• Understanding Debit Valuation Adjustment (DVA)
• The controversy around DVA
• The concept of Funding Valuation Adjustment (FVA)
• Integrating CVA, DVA, and FVA into a single framework
• The importance of a holistic approach to valuation

Module 7: Collateral and Netting

• The role of collateral in mitigating risk
• The mechanics of a Credit Support Annex (CSA)
• The importance of collateral disputes and operational risk
• The legal enforceability of netting agreements
• The role of margining systems

Module 8: Regulatory Frameworks and Basel III

• The evolution of regulations for counterparty credit risk
• The Basel III framework and its key components
• The use of the Internal Model Method (IMM)
• The Standardized Approach for Counterparty Credit Risk (SA-CCR)
• The impact of regulations on business strategy

Module 9: Central Clearing and CCPs

• The principles of central clearing
• The role of CCPs in reducing systemic risk
• The benefits and challenges of clearing derivatives
• The concept of a clearing member's default fund
• The regulatory push for more clearing

Module 10: Model Validation and Governance

• The importance of model risk management
• The process of model validation
• The role of an independent validation team
• The challenges of validating complex derivative models
• Best practices for model governance

Module 11: Hedging Counterparty Credit Risk

• The principles of hedging CVA
• The use of credit default swaps (CDS)
• The challenges of dynamic hedging
• The impact of basis risk
• The role of portfolio-level hedging

Module 12: Credit Risk and the Trading Book

• Integrating counterparty risk into trading and pricing
• The impact on trading strategies
• The importance of real-time risk reporting
• The challenges of managing a complex portfolio
• The role of front-office risk tools

Module 13: Operational Risk in Derivatives

• The importance of back-office processes
• The challenges of trade confirmations and settlement
• The role of robust data management
• The risks of manual processes and human error
• Best practices for operational efficiency

Module 14: Case Studies in Financial Crises

• Analyzing the role of counterparty risk in the 2008 financial crisis
• The collapse of Lehman Brothers and its impact
• The European sovereign debt crisis
• The importance of stress testing
• Lessons learned from history

Module 15: Final Project and Discussion

• A hands-on project to build a simple risk calculation model
• Presenting your model and findings
• A discussion of remaining challenges and open problems
• The importance of a continuous learning mindset
• The future of counterparty credit risk management

Training Approach

This course will be delivered by our skilled trainers who have vast knowledge and experience as expert professionals in the fields. The course is taught in English and through a mix of theory, practical activities, group discussion and case studies. Course manuals and additional training materials will be provided to the participants upon completion of the training.

Tailor-Made Course

This course can also be tailor-made to meet organization requirement. For further inquiries, please contact us on: Email: info@skillsforafrica.org, training@skillsforafrica.org  Tel: +254 702 249 449

Training Venue

The training will be held at our Skills for Africa Training Institute Training Centre. We also offer training for a group at requested location all over the world. The course fee covers the course tuition, training materials, two break refreshments, and buffet lunch.

Visa application, travel expenses, airport transfers, dinners, accommodation, insurance, and other personal expenses are catered by the participant

Certification

Participants will be issued with Skills for Africa Training Institute certificate upon completion of this course.

Airport Pickup and Accommodation

Airport pickup and accommodation is arranged upon request. For booking contact our Training Coordinator through Email: info@skillsforafrica.org, training@skillsforafrica.org  Tel: +254 702 249 449

Terms of Payment: Unless otherwise agreed between the two parties’ payment of the course fee should be done 10 working days before commencement of the training.