ACF Academy
Risk Management Training Training
 Risk Management Training
Targeted Audience:
 Risk managers and those concerned with monitoring, managing, or regulating the risk arising from derivatives transactions.
 A working understanding of derivatives.
CPE Credits:
 14 hours
Course Level:

Credit Exposure of Derivatives

This two-day programme focuses on the potential losses arising from derivatives portfolios exposed to credit and counterparty risk. The programme will blend instructor-led training sessions with practical hands-on workshops and mini-cases using pricing tools, and risk analysis, and simulation. A central part of the programme will be an in-depth case study based on banks' own experiences.

The principal objectives of this intensive two-day seminar are to:
  Develop a solid conceptual understanding of the methods used to estimate credit exposure on derivative transactions
  Review and explain the characteristics of credit risk arising from swaps and other derivative products
  Provide an intuitive awareness of the level and magnitude of credit risks – not the mathematical minutiae, but a sense of what looks right and what demands further analysis
  Analyse the credit exposure from exotic and more complex derivative transactions
  Consolidate understanding by providing practical examples illustrating each of the concepts covered
Hot Topic  Managing credit risk during the credit crisis.

Course Outline
 Measuring and Managing Risk
  Measuring market risk
Identifying overt and covert risks
The VaR principle applied to market risk
Dollar Earnings at Risk (DEaR)
The portfolio approach
  Links between:
Credit risk and market risk
Liquidity risk and other risks
  Managing risk
Brief review of collateral and collateral management
Brief review of operational risk
Settlement risk, netting, and DVP
Legal risk and legal Issues
Structuring to reduce risk
 Calculating Credit Exposure – Part 1
Components of credit exposure: monetary risk and event probability
Financial exposure from derivatives
Average vs. peak exposures
Modelling session using a credit risk pricing system
 Review of Swaps and Swap Credit Risks
Interest rate, currency, and equity swaps
Swap cash flows
Principles of swap pricing and valuation
Credit risk of swaps
 Major Case Study
In this important section of the program, delegates will be split into small teams and be given dossiers summarising proposed transactions for a small number of clients. The task for each team will be to identify and assess the credit risk, to consider and prepare recommendations, and then to present these recommendations formally.

During the session, delegates will be able to use a credit risk pricing system to assess the impact of credit risk. At the end, the instructors will debrief the analysis, and present their own assessments.

The case study will therefore comprise:
Identifying and quantifying the credit risk
Preparing recommendations
Presentations of recommendations
 Calculating Credit Exposure – Part 2
Drivers of exposure
Potential vs. actual credit exposure
Impact of market risk on credit exposure
Relatedness vs. unrelatedness
What do the numbers actually mean?
Calculating credit risk from distributions of probability and LGD
 Pricing Credit Risk
Overview of credit default swaps (CDS)
Obtaining default probabilities and recovery rates from CDS
How to price credit risk using CDS
Calculating the cost of credit risk
 Credit Derivatives
Types of credit derivative
Credit events
Using credit derivative swaps
The credit risk of credit derivatives
 Major Case Study
Credit risk in exotic and complex transactions
What makes an exotic transaction exotic?
Credit and liquidity risk implications for exotics
Exotic options
Structured products
Examples of exotic transactions
Assessing credit risk for an exotic derivative


NB All practical sessions are highlighted like this:
means a Workshop or Simulation
means a Case study


"Once again, an excellent ACF course - I am always so impressed with these guys.  The instructor was amazing... energetic, patient, thorough, knowledgeable and entertaining."

– Heather F.