Professional Documents
Culture Documents
PRMIAs
Associate PRM Webinar Series
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PRMIA 2016
Welcome to Session A of the Associate PRM Webinar Series
This material is the intellectual property of PRMIA and shall not be reproduced or used without the express written permission of PRMIA.
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PRMIA 2016
Audio and Questions
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PRMIA 2016
This material is the intellectual property of PRMIA and shall not be reproduced or used without the express written permission of PRMIA.
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PRMIA 2016
Attentiveness
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during a session if that the attendee no
longer has GoToWebinar as the "active"
window on their computer.
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PRMIA 2016
How Poll Questions Work
1. Click circle
next to your
answer
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Submit
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PRMIA 2016
Book:
Essentials of Risk Management (EoRM)
Second Edition
This material is the intellectual property of PRMIA and shall not be reproduced or used without the express written permission of PRMIA.
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Slide Deck:
Please print the slide deck prior to each session for note
taking.
Check the webpage (link provided in syllabus) prior to
each session for possible updates.
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PRMIA 2016
Bookmark the syllabus link:
Please bookmark the syllabus link. You will find links to:
The live webinar sessions
The reading assignments
The presentations
The recorded sessions with access instructions
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PRMIA 2016
Welcome to Session A
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PRMIA 2016
Introduction to the Associate PRM
Intended for staff entering risk management, who interface
with the discipline, or who need a broader understanding of
financial risk practices
A practical exam that does not require mathematical
knowledge and includes limited theory
Syllabus material includes:
Selected chapters from the 2nd edition of The Essentials of
Risk Management (EoRM) by Michel Crouhy, Dan Galai and
Bob Mark
Excerpts from the PRMIA Guide to Financial Markets
Risk Management Practices two abridged chapters from the
PRMIA PRM Handbook Risk Theory and Best Practice
The PRMIA Standards of Best Practice, Conduct and Ethics,
PRMIA Bylaws, and PRMIA Governance Principles
PRMIA Case Studies
(All except the EoRM are available from the PRMIA website.)
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PRMIA 2016
Overall Associate PRM Learning Objectives
Gain a familiarity with:
The concept of risk management and its place in the business
An overall understanding of the concepts of risk management
techniques in a non-quantitative framework
The structure and workings of various financial markets and the
financial instruments used in risk management
Understand:
How governance fits into the concept of risk management
The concepts of risk and return, interest rate risk and hedging,
asset-liability management market, credit, operational and
enterprise risk management
How performance can be measured
Industry standards and best practices
The positive role that risk management can play
The goal of the series is a general, widespread understanding
and the ability to develop skills; not becoming an expert in
any one area
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PRMIA 2016
Associate PRM Logistics
An automated exam taken in a controlled test centre
A calculator is not required nor allowed any simple maths needed
can be done on a scrap sheet
90 questions in 180 minutes (2 minutes/question)
All questions are narrative and multiple choice with four options
and only one right answer
Exam is in 8 sections (A-H) each with 8-12 questions
Sections are taken in sequence, questions within a section are
random
The candidate can return to questions, or mark an answer to revisit
later
The result is given within 15 working days
The exam cannot be repeated in less than 90 days
If an exam is repeated, the candidate will not get the same
questions
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PRMIA 2016
Study Comments
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PRMIA 2016
Further Sources of Information
www.investorwords.com
www.investopedia.com/?viewed=1
www.businessdictionary.com
www.answers.com
www.useconomy.about.com
Note: Everyone has their own favourites. One cannot always depend on these
services. Many of them are highly opinionated and may only put forward one side
of any view. Some simply can be wrong! From the exams point of view, the
syllabus material is always right!
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Exam Comments
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PRMIA 2016
Session A
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Learning Objectives
After completing this session, participants will be able to:
Define financial risk and risk types
Define the risk management process
Define the role of the risk manager
Identify the balance between risk and reward
Implement a financial risk management program
Define hedge accounting and diversification
Define the efficient portfolio and other methods
Identify basic concepts of a call options value
Define the concept of risk-adjusted returns
Reading material includes Chapters 1, 2 and 5 from the 2nd edition of EoRM
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The Global Financial Crisis of 2007-2009
Have the events of 2007-9 changed the focus of risk
management?
The importance of risk governance (e.g. of boards and senior
management understanding of the risks)
The role of a risk manager is not to try to read a crystal ball, but to
uncover the sources of risk and to make them visible (transparent)
to key decision makers in both normal and stress markets
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Risk in Stress Markets :Dodd-Frank Act Stress Test (DFAST)
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What is Risk?
The future cannot be predicted (you can never predict the future)
Predicted costs result in expected losses (cost of business)
unpredicted costs give unexpected losses
Risks are unpredicted costs a variability in cost that can be
quantified in terms of probability
Losses can be predicted for large, well diversified portfolios with
unlinked risks such as credit cards
Lumpy corporate loan portfolios (fewer larger value loans) have:
Linked risk factors covariance statistics
That can all go wrong together correlation risk
Probability that varies with time (stochastic covariance)
Variability that can be quantified in terms of probability = risk, variability that
cannot be quantified at all = uncertainty (Frank H Knight, Risk Uncertainty and
Profit, 1921)
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Lumpy or Non-Lumpy?
A typical corporate
lending portfolio
Number of assets
Number of assets
Value of assets
A typical credit
card portfolio
Value of assets
Glossary of Risk Types
Appendix 1.1, page 23
* These descriptions are key areas and should be given priority in studies.
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PRMIA 2016
Glossary of Risk Types
(continued Appendix 1.1)
Operational Losses from breakdowns in operations caused by people
Risk processes, technology
These descriptions are key areas and should be given priority in studies.
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Schematic Presentation, by Categories of Financial Risks
Figure 1A-2, Page 24
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Question #1
Q There are four major types of market risk. These are:
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Answer for Question #1
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The Risk Managers Job
The risk manager identifies sources of risk, estimates probabilities
(likelihood) and impacts (severity)
VaR (Value at Risk) has shortcomings and is best used for short
periods in normal markets
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The Risk Management Process
Figure 1-1, page 2
Identify risk exposures
Evaluate performance
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Risk Culture Questions
(note: Full actual survey available)
Poll Question
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Financial Risk Management
Statutory requirement in the U.S. (Sarbanes-Oxley, 2002) made
managers liable if they exposed their firm to undue risk through
poor practices
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The purpose of Basel III is to prevent a
financial crisis from happening again in the
future by imposing:
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Financial Hedging in Practice
Determine the objectives
Manage volatility in accounting profits vs. managing economic
profits, over what term?
Evaluate performance
When? Transaction and disclosure costs changes of plans
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The +/- of Financial Risk Management Hedging
Against For
In practice, markets are not Excessive and unprotected
perfect losses can cause financial
distress and bankruptcy
Complex instruments can
distract management Hedging can protect firms
Financial risk management that use commodities
requires specialist skills Hedging reduces volatility and
... and specialist systems subsequent tax liability peaks
and processes Shareholders need to be
Gearing accelerates volatility protected against excessive
down as well as up risk taking
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PRMIA 2016
Risk vs. Reward
Safe (risk free) investments yield lower yields because they are
safe (assumed free from default)
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PRMIA 2016
Risk Can be Difficult to Price
The risk for transactions that are NOT market-traded is
harder to price it can be distorted by:
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Question #2
a) Insurance
b) Secondary share flotations
c) Currency swaps
d) Collateralized debt obligations
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PRMIA 2016
Answer to Question #2
Q Which of the following financial transactions is not
used by a risk manager in the management of
financial risk?
Note that not questions are not uncommon in the exam. Read carefully,
however, you should not find double negative questions.
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PRMIA 2016
Theories on Risk and Return
A basic understanding of the underlying models and
principles is important as it helps one understand the rest of
the syllabus, and to understand and interact with other risk
professionals, especially the quantitative analysts.
Examples of basic theories are:
The beginnings of Modern Portfolio Theory (MPT)
(Harry Markowitz, 1952)
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PRMIA 2016
Efficient Portfolio Theory
Figure 5-1, page 185
Efficient-portfolios.com
Harry Markowitz, The Principles of Portfolio Selection
University of Chicago, 1952 (Nobel Prize 1990)
Investors select their portfolio based on profit (average return) and risk
(variance on this return)
Diversification reduces risk as individual returns can move in different
directions
For every level of risk an investor wishes to take on there is an efficient
(optimal) asset diversification
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PRMIA 2016
Capital Asset Pricing Model (CAPM)
Builds on Markowitzs Portfolio Theory
Decomposed risk into two portions:
Risk that can be reduced to zero through diversification
(diversifiable or specific risk)
Risk that cannot be eliminated through diversification
(systematic risk)
Calculates the market risk premium (what investors get for
taking on the risk) by subtracting the interest rate of default-
free assets (e.g. treasury bonds) from the market return
Beta for an asset which has zero correlation with the market
portfolio = 0
Beta for the market portfolio (i.e. all possible assets) = 1
A single asset will therefore have a beta which ranges either
side of 1
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Question #3
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Answer to Question #3
a) The CAPM definition is the risk free rate plus the beta
times the risk premium
b) The CAPM definition adds a premium to the risk free rate
c) The CAPM definition adds the risk free rate with the beta
times the market risk premium
d) Risk-free interest rate + (expected rate of
return on the market portfolio risk-free interest rate)
correct by definition
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The Greeks
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Beta Risk
Figure 5-2, page 189
Expected
Return D
C
RM
B
A
Expected ROR Risk-free ROR
RF
(BETA) = Market ROR Risk-free ROR
0 1
(Beta Risk)
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Question #4
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Answer to Question #4
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Option-Pricing Theory
Black-Scholes in 1973
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The Math
The Black-Scholes formula is: C0 = S0N(d1) - Xe-rTN(d2)
Where:
d1 = [ln(S0/X) + (r + 2/2)T]/ T and d2 = d1 - T, and C0 =
current option value, S0 = current stock price, N(d) = the probability
that a random draw from a standard normal distribution will be less
than (d), X = exercise price, e = 2.71828, the base of the natural log
function, r = risk-free interest rate, T = time to option's maturity, in
years, ln = natural logarithm function, and = standard deviation of
the annualized continuously compounded rate of return on the stock
And you dont have to remember any of this as it is not in the syllabus!
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Question #5
a) 6%
b) 9%
c) 16.5%
d) 20.5%
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Answer to Question #5
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Explanation for Question #5
So a beta of zero would be the same as the underlying risk-free rate (6% + 7x0 =
6%), a beta of 1 would be the same as the average historic rate (6% + 7x1 = 13%).
A negative beta means the return is less than the risk-free rate.
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PRMIA 2016
Thank you for viewing this session!
The reading assignment for Session B is Chapter 4 from the 2nd edition of
EoRM plus the PRMIA Standards of Best Practice, Conduct and Ethics, as
well as the PRMIA Governance Principles and the PRMIA Bylaws
found at:
http://www.prmia.org/sites/default/files/references/AssociatePRMReading.pdf
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Dr. Robert M. Mark
Dr. Robert M. Mark is a Founding Partner of Black Diamond Risk which provides corporate governance, risk management consulting, risk
software tools and transaction services. Dr. Mark is also the Founding Executive Director of the Masters of Financial Engineering Program
at the UCLA Anderson School of Management. He serves on several boards as well as on Checkpoints Investment Committee. In 1998, he
was awarded the Financial Risk Manager of the Year by the Global Association of Risk Professionals (GARP). He is on the Executive
Committee of the Board of the Professional Risk Managers International Association (PRMIA).
Prior to his current position, he was the Senior Executive Vice-President and Chief Risk Officer (CRO) at the Canadian Imperial Bank of
Commerce (CIBC). Dr. Mark was a member of the Management Committee. His global responsibility covered all credit, market, and
operating risks for all of CIBC as well as for its subsidiaries. Prior to his CRO position, Dr. Mark was the Corporate Treasurer at CIBC.
Prior to CIBC, he was the partner in charge of the Financial Risk Management Consulting practice at Coopers & Lybrand (C&L). The Risk
Management Practice and C&L advised clients on risk management issues and were directed toward financial institutions and multi-
national corporations. This specialty area also coordinated the delivery of the firms accounting, tax, control, and litigation services to
provide clients with integrated and comprehensive risk management solutions and opportunities.
Prior to his position at C&L, he was a managing director in the Asia, Europe, and Capital Markets Group (AECM) at Chemical Bank. His
responsibilities within AECM encompassed risk management, asset/liability management, research (quantitative analysis), strategic
planning and analytical systems. He served on the Senior Credit Committee of the Bank. Before he joined Chemical Bank, he was a senior
officer at Marine Midland Bank/Hong Kong Shanghai Bank (HKSB) where he headed the technical analysis trading group within the Capital
Markets Sector.
He earned his Ph.D., with a dissertation in options pricing, from New York Universitys Graduate School of Engineering and Science,
graduating first in his class. Subsequently, he received an Advanced Professional Certificate (APC) in accounting from NYUs Stern
Graduate School of Business, and is a graduate of the Harvard Business School Advanced Management Program. He is an Adjunct
Professor and co-author of Risk Management (McGraw-Hill), published in October 2000, as well as a co author of The Essentials of Risk
Management (McGraw Hill) published in December 2005. Dr. Mark served on the board of ISDA as well as the Chairperson of the National
Asset/Liability Management Association (NALMA). Dr. Mark is also currently a lecturer on Risk Management at the University of California,
Berkeley.
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Text References
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