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Fundamentals of Derivative Risk

Learn about the risks that the use of derivative markets inevitably generates with this highly-structured overview

Fundamentals of Derivative Risk Training Course

A two-day course

  • Asset Managers
  • Junior Traders
  • Sales
  • Middle office
  • Risk
  • Compliance
  • Anyone wanting to understand the Fundamentals of Derivatives

  • Interactive delivery of expertise on derivative mechanics, trading and hedging strategies
  • Up-to-date analysis of accounting, regulation and valuation of derivatives in the UK, Europe and worldwide
  • Range of relevant, topical in-depth examples of the results of the misuse of derivatives and their consequences
  • Focused on providing delegates with a skill-set appropriate to managing the challenges derivatives can solve, without undue risks to cashflows and profits

  • Understand how derivatives work, what markets they are relevant to, and how to price and execute a risk management or trading strategy
  • Appreciate all the risks that come with using derivatives: market, operational and credit, and how they can disrupt risk management strategies
  • Study and evaluate the rise of central counterparties and how they have affected OTC (over-the-counter) and Exchange derivative trading
  • Learn the current state of derivatives regulation in the UK, Europe and worldwide

Day One: The use of derivatives and market risk

How derivatives work – types and uses

  • Forward markets
  • Options
  • Futures
  • Swaps
  • Exotics
  • Exchange-traded derivatives vs OTC derivatives
  • Hedging using derivatives (worked examples)
  • Exercises: Looking at Hedging strategies for each product. Who uses them and why
  • Case study: Dynamic Hedging of IRSs. Understanding the use of Duration , Convexity, PV01 (point value), and DV01 (Dollar Value) to calculate the correct hedge ratio
  • Exercise: Participants value a swap and calculate the hedging ratio. They then revalue the swap after a move in the market and see how efficient the hedge is!
  • Trading for profit using derivatives (worked examples)
  • Case Study: Analysing payoffs from different derivative strategies

Derivative markets

  • Equity traded fund
  • Currencies
  • Interest Rates
  • Commodities
  • Exotics - Energy
  • Group Exercise: Delegates will value a series of derivatives using excel. 

Market Risk

  • Defining market risk
  • Forecasting errors and their consequences
  • Case study: Nordpool Power Derivative structures and loss
  • Identifying market risk derivatives sensitivity
  • Liquidity
  • Case Studies: LTCM (Long-Term Capital Management) and Amaranth Advisors – designing improved strategies to avoid liquidity traps
  • Volatility
  • foreign exchange
  • term structure 

Day Two: Derivative Risks and their management

Operational Risk

  • What can go wrong with using derivatives?
  • Examples of major trading losses
  • Case Study: How did Societe Generale lose €5billion on a Delta One Desk?
  • Case study: What went wrong with the risk in derivatives trading for the ”The London Whale”
  • Case study: Cathay Pacific Oil Hedge backfires
  • The complexity and sophistication of complex financial products leading to hidden risks posed
  • Case study: What are the hidden risks in the CLO (Collateralised loan obligations) market today
  • Regulatory and risk capital allocation pressures
  • Case study: Market Risk and Capital Allocation - Participants learn the importance of capitalused for underlying profitability
  • Improved communications and reliance upon efficient IT systems
  • Case Study: Hong Kong’s derivative exchange failures in 2019 

Risk Measurement Tools

  • historical simulation approach
  • scenario analysis
  • variance, covariance and correlation
  • Monte Carlo simulation method
  • VaR (Value-at-risk)
  • duration and convexity
  • risk parameters – the Greeks
  • yield curve modelling
  • stress testing
  • other tools
  • Group Exercise: Delegates will use Excel to produce fair value and mark-to-market models and derivative valuations

Credit Risk

  • Defining credit risk (default and settlement)
  • CVA Adjustment
  • Managing CVA risk through CDSs (credit default swap)
  • Exercise: participants calculate the CVA (Credit valuation adjustments) of an IRS through its life cycle
  • Counterparty risk derivatives
  • The move to central counterparties
  • What would happen if a clearing house failed?
  • Case Study: Collateral Settlement Failure – how real a threat?
  • Interconnection Risk
  • Evaluating netting agreements
  • How collateral management banking can help reduce credit risk 

Accounting and Regulation of derivative exposure

  • Hedge effectiveness and accounting issues in business (IAS 39 and IFRS 9)
  • Overview of regulations
    • EU (European Union) Capital Adequacy Directive
    • Basel III/IV 
Course Conclusion: how to manage derivative risk

The trainer worked in Investment Banks including HSBC and Bank of Montreal for nearly 20 years. During this time, he worked in Operations and then as a trader, running books in FX, bonds and derivatives.

The trainer has run courses all over the world including Amsterdam, Dublin, London, New York, Hong Kong, Singapore, Jakarta, Johannesburg, Delhi, Accra, Johannesburg etc.

The trainer delivers courses which focus on providing a practical and in-depth understanding of the markets from a Trading, Operations and Risk viewpoint. His courses are interactive and stimulating, offering delegates the opportunity to participate in an environment which encourages free discussion of the real issues faced in the workplace.

In addition to his training activities, he has undertaken various consultancy projects, such as an in-depth collateral risk assessment at a major European Investment bank.

The trainer held the position of Non-Executive Director of Cazenove’s Derivative Oversight Committee for many years. Acting as a member of the committee in a general consultative capacity to assess the firm’s derivative capabilities and risks.

The trainer has also presented at JPMorgan Forums in London, speaking on topics such as the Benefits and Risks of Derivatives. He along with representatives from the FSA, law firms, hedge funds etc. were asked to give their views on the risks of derivatives to 150 / 200 Directors and senior managers from the top investment firms in the UK.

This course provides a highly structured overview of the derivative investment market and the risks that their use inevitably generates. Delegates first learn how futures, forwards and swaps work, using multiple case studies.  The course will also provide an overview of hedging and trading strategies, valuation and hedge accounting. This knowledge is then used to explain all the risks that using derivatives for trading and risk management purposes can generate, with a range of examples of problem trades and corporate disasters drawn from worldwide experience. Finally, the course equips delegates with the knowledge and skills to minimise these risks in practice, both in a financial and a corporate setting.


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