1 Permanent education Block: Derivatives, Financial Markets and Balance Management Coordinator: Drs. Eric Mathijssen Shadow coordinator: Drs. Robert Daniels In this block, the balance management of financial institutions is further explored. For this, students learn to understand the structure and processes of financial markets and financial products and to identify and manage the risks arising from this. Students learn quantitative methods and techniques for valuing derivatives and how these derivatives are embedded in financial products. Students learn to use this knowledge when covering financial risks of products and institutions. Here, attention is explicitly paid to the role of the participants in markets and their contribution to behavioral risk. Derivatives, Financial Markets and Balance Management Derivatives - Students learn to understand and use quantitative methods and techniques for valuing derivatives. Students learn how derivatives are embedded in financial products and the effect on the risk of products and organizations. - Students learn to use this knowledge when covering financial risks of products and institutions. Characteristics and functioning of financial markets - Students learn to understand the structure and processes of financial markets and financial products and to identify and manage the risks arising from this. - Students learn to understand the role of the participants in those markets and their contribution to behavioral risk and to identify and manage the risks arising from this. Balance management - Students learn methods and techniques of balance management for banks, insurers and pension funds, and to use them. - In the cases, the theory is applied to and tested against practical situations. It is learned when and how these techniques are better and less useful. And how to apply this in practice. Students learn to write and present details in a concise and purposeful way. Overview lectures Subsequently, a (short) description of the content is given for each lecture.
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Permanent education
Block: Derivatives, Financial Markets and Balance Management
Coordinator: Drs. Eric Mathijssen
Shadow coordinator: Drs. Robert Daniels
In this block, the balance management of financial institutions is further explored. For this, students
learn to understand the structure and processes of financial markets and financial products and to
identify and manage the risks arising from this. Students learn quantitative methods and techniques for
valuing derivatives and how these derivatives are embedded in financial products. Students learn to use
this knowledge when covering financial risks of products and institutions. Here, attention is explicitly
paid to the role of the participants in markets and their contribution to behavioral risk.
Derivatives, Financial Markets and Balance Management
Derivatives
- Students learn to understand and use quantitative methods and techniques for valuing derivatives.
Students learn how derivatives are embedded in financial products and the effect on the risk of products
and organizations.
- Students learn to use this knowledge when covering financial risks of products and institutions.
Characteristics and functioning of financial markets
- Students learn to understand the structure and processes of financial markets and financial products
and to identify and manage the risks arising from this.
- Students learn to understand the role of the participants in those markets and their contribution to
behavioral risk and to identify and manage the risks arising from this.
Balance management
- Students learn methods and techniques of balance management for banks, insurers and pension funds,
and to use them.
- In the cases, the theory is applied to and tested against practical situations. It is learned when and how
these techniques are better and less useful. And how to apply this in practice. Students learn to write
and present details in a concise and purposeful way.
Overview lectures
Subsequently, a (short) description of the content is given for each lecture.
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Lectures 1 to 5
Date 5, 12, 19, 26 September and 3 October 2018
Time 19: 00-22: 00
Location Agora 2
Title Derivative theory
Teacher Michiel Lodewijk and Norman Seeger
Content
Derivatives are financial instruments that derive their value from the value of another underlying asset
(e.g. share prices, interest rates, inflation, temperature or creditworthiness). Derivatives can be used for
various purposes, such as risk management (covering positions), speculation, arbitrage or the creation of
synthetic positions. The most well-known derivatives are forwards, swaps and options. In recent years,
the size and complexity of derivatives (markets) have increased considerably. It is therefore also
important to have a good understanding of the basic principles of derivatives. John C. Hull writes in his
book: "One way of ensuring that you understand that a financial instrument is to value it. The basic
principles of derivatives are elaborated in this lecture series from an economic perspective.
The starting point for valuing derivatives is arbitrage theory. This results, under certain assumptions,
that when valuing derivatives, it can be assumed that investors are risk-neutral, ie not risk avers or risk-
seeking. In the valuation, a further distinction can be made between the so-called risk-free value of a
derivative and the observed price. In the price observed, various risks / costs have been included in the
price since the financial crisis.
A number of technical concepts are discussed that follow from the principles of the arbitrage theory,
such as the put-call parity, the binomial model and the Black-Scholes-Merton (BSM) model. The
sensitivities of option positions on the basis of the Greeks are also discussed and the modeling of
volatility is discussed. Mandatory literature Hull, John C., "Options, Futures and other Derivatives", 10th
global edition, Pearson.
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Lecture 6
Date October 9, 2018
Time 19.00-22.00
Location Forum 2
Title Designing an operational Risk Framework
Teacher Rik Ghijsels
Central question
How do you set up an effective operational risk-based framework for derivatives?
Content
Operational risk occurs in all companies and contains a very broad definition related to risks from
internal processes, people, systems and external events. In this course, the crucial importance of
managing operational risks for derivatives will be indicated on the basis of a number of practical
examples. In the past, operational risk management was often of less importance than the attention
paid to market and credit risk. Also the management of operational risk was often reactive, while a
proactive approach could contribute to a more optimal and profitable business.
Setting up an operational risk framework is the basis for managing and mitigating operational risks. The
various building blocks of a well-functioning operational risk framework will be discussed, such as
governance, risk assessments, loss database, risk indicators and risk reports. In order for these
theoretical building blocks to be successful in practice, the framework must be implemented and
accepted within the entire organization in the various business processes. This will also address the
necessary change in culture to identify and prevent operational risk.
Learning objectives
After this course, students can:
- Identify the main building blocks of an operational risk framework
- Display a further elaboration of these building blocks
- Indicate which culture changes are necessary for the successful implementation of an effective
operational framework
Literature
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- Philippa X. Girling: Operational Risk Management: A Complete Guide to a Successful Operational Risk
Framework 1st Edition Chapter 1 through 10, Chapter 11-18.
- How does DNB assess the management of operational risks at companies? including Self-assessment
spreadsheet
http://www.toezicht.dnb.nl/3/50-229146.jsp
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Lecture 7
Date October 16, 2018
Time 19.00-22.00
Location Forum 2
Title Balance Sheet Management for Pension Funds
Teachers Manon ten Voorde and Eric Mathijssen
Central theme
To experience the financial dynamics of a pension fund's balance sheet through a simulation
Summary
Staying on a robust policy with PensionSim
With a robust policy, a pension fund can be rescued under all circumstances. If the economy is against or
against, but also in extreme events. With PensionSim's simulation, you as a director of a pension fund
test your investment strategy in different scenarios. You live through the unpredictable reality of
everyday life and you gain a wealth of practical experience.
With the PensionSim you as a driver are at the controls yourself. As the head of a fictitious pension fund,
you put together the portfolio with your team. You select the instruments to realize your fund targets,
taking into account changing circumstances. The simulation accurately mimics reality. You therefore
need all your insight to guide your pension fund to a safe haven.
PensionSim is not an investment game with the aim of achieving the highest funding ratio. However, the
simulation tests whether the player conducts a stable policy, in line with the set goals and limits. You
control the fictitious pension fund for fifteen years. This is possible because a month in the game, for
example, takes 30 seconds. You can adjust the investment mix, hedge market risks and decide on
indexation, while stock prices, interest rates and inflation will rise and fall.
PensionSim is designed because it is crucial for risk managers to look critically at policy and ensure
robustness. The future is uncertain and unpredictable. With a resilient strategy, fund managers can
however prepare for this. The empathy with the practice in this simulation contributes to this.
Study aim The added educational value of PensionSim is that participants playfully learn how to deal
with risks. By playing the simulation, participants experience the importance of thinking beforehand
about and determining risk appetite and degree of hedging. In addition, the game provides insight into
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decision-making processes within a board. After all, the quality of this is leading to the outcome of the
pension fund.
Literature
None
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Lecture 8
Date October 30, 2018
Time 19.00-22.00
Location Forum 2
Title Balance Sheet Management for Insurance Companies
Teacher Jeffrey Hennen
Central question
How is the balance of an insurer managed in practice? '
Content
Insurers are under severe pressure due to the recent crises on the financial markets, the changing
demand for insurance products and new laws and regulations. The manager of an insurer must take into
account various stakeholders (policyholders, shareholders, employees) and various financial frameworks
(Solvency II, IFRS, S & P). The management of an insurer's balance sheet has thus become a complex
undertaking.
The balance of the insurer is central in this course. We look at how the risk appetite of the insurer is
defined and how the risk appetite is converted into practical guidance. Which risks are accepted and
which risks are covered? Which instruments are used to cover those risks?
A complicating factor in steering the balance is that a balance can be looked at in different ways.
Legislation and regulations (Solvency II) must be complied with, but the insurer must also steer an
economic framework in order to remain viable in the longer term. Elements from Solvency II - such as
the UFR and the Volatility Adjustment (VA) - make the management of the balance more complex in
practice. Regulations can ensure that hedging is not optimal economically.
An additional complicating factor in steering the balance sheet is the presence of embedded options and
guarantees in the products of (mainly) life insurers. By means of a case that the students themselves
develop during the lecture, a number of techniques are used to determine the (market) value of these
embedded options and guarantees.
Learning objectives
The student must:
- knowing the balance sheet of an insurer and identifying the most important risk drivers;
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- to understand the differences between (financial) frameworks and to explain how these balance
controls complicate;
- Understand how an insurer should balance risk and return in order to remain viable in the long term;
- understand what embedded options and guarantees are, and which techniques can be used to value
them.
Literature
- Bouwknegt, Pieter, "Built-in options in life insurance", July 2003, De Actuaris
- Bouwknegt, Pieter, "Balance management at an insurer", January 2011, De Actuaris
- Frans de Weert, Bank and Insurance Capital Management, Wiley 2011 (H1, 2.2, 3.2, 8.2 - 8.3, 10.5 -
10.7.17)
Additional literature
PwC, Banana Skins Insurance 2015
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Lecture 9
Date 6 November 2018
Time 19.00-22.00
Location Forum 2
Title Balance Sheet Management for Banks
Teacher Jaap Karelse
Central question
How does a bank manage and optimize its balance sheet? Which risks are weighed and controlled?
Content
Balance sheet management at banks, also referred to as 'Asset & Liability Management', has received
increasing attention in recent times for various reasons. Measuring and managing the various risks on
the bank balance sheet (the banking book) is a process that has to take into account more and more
requirements and preconditions. The amount of regulation in this area has increased considerably and is
still developing further. While activities in trading books have received relatively much attention in
recent times, banks have been relatively free to manage the activities in the banking book at their own
discretion. In the meantime, the recent requirements from EBA and BCBS have changed in this area. The
exact interpretation of these requirements varies from bank to bank and is in most cases still 'work in
progress'.
This course will further discuss the ways to look at the various activities in the banking book from a risk
management perspective. The consistent measurement of the exposures and risks of these activities is
discussed, as well as the dilemmas in achieving a compromise between complexity and manageability.
Account will have to be taken of the capital and liquidity requirements and also the return targets as
expected by the market.
How can these risks be managed with, for example, derivatives, and how can they be used in practice?
We will discuss the various ways in which the management of these risks is looked at, for example from
a value or income perspective, or from a risk-neutral or 'real world' perspective. We will see that there is
no fully optimal solution, but that choices must be made, both strategically and modeling. The recent
proposals from the regulator will also be taken into account.
In addition to this lecture, a lecture entitled 'Balance management in practice' is planned on 20
December, in which the substance discussed in this lecture is further elaborated and tested in
simulation form.
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Learning objectives
Recognizing the different risks on a bank balance:
- Insight into the ways in which these risks can be modeled for the various activities on the balance sheet
- Gain insight into the different perspectives and preconditions in managing these risks, and the
weighing of risks and rewards from a strategic perspective
- Determine what consequences new regulations have on balance management
Literature
Chapters 8 and 9.1 of 'Risk management in banking' by Joël Bessis, fourth edition
- Guidelines on the management of interest rate risk arising from non-trading activities, 22 May 2015,
EBA
- 'Standards - Interest rate in the banking book', 12 April 2016, Basel Committee on Banking Supervision
- 'Managing interest rate risk for non-maturity deposits', Marije Elkenbracht, Bert-Jan Nauta, AsiaRisk,
December 2006-January 2007
- Interest Rate Risk in the Banking Book, Paul Newson, 2017
Optional literature
Webinar 'Fundamentals of financial risk management'
https://youtu.be/4vZ01BaoXUY
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Lecture 10
Date November 13, 2018
Time 19.00-22.00
Location Forum 2
Title Central Clearing and OTC Derivatives
Teacher Robert Daniëls
Central question
What is the role of Central Counterparties? How do they reduce systemic risk?
Content
Financial derivatives are used by financial companies to manage their balance sheets. After the financial
crisis in 2008, regulators around the world questioned the role of bilateral OTC derivatives. What risk
does a financial institution run with certain derivative positions and as a consequence what systemic
risks are voting from these derivative transactions? One of the proposed solutions by the G-20 was to
reduce systemic risks by:
i) making bilateral transactions more costly; and
ii) introducing new regulations for Central Counterparties (EMIR) with the aim of letting CCPs play a
more important role in the overall market.
The key focus of regulators is mitigating counterparty risk and reducing systemic risk. However, what
risks do you have?
This lecture focuses on CCPs and provides insight into the liquidity and counterparty risks. On the other
hand we will see that we can never be excluded and is often transformed. The aim of the lecture is to
discuss how end-users can protect themselves from the CCPs.
Learning objectives
After this lecture, students are able to
- Understand EMIR, the role of CCPs and how counterparty risk is mitigated
- Analysis the risks inherent in OTC derivatives and mandatory clearing regimes
- Understand the impact collateral management requirements have on balance sheet management
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- Understand contingent liquidity risk and alternative approaches to managing it
Literature
- DNB, 2013, "all Ins & Outs of CCPs", http://www.dnb.nl/binaries/All_Ins_Outs_CCPs_tcm46-
288116.pdf
- DNB Points of attention, 11 August 2014.
http://www.toezicht.dnb.nl/binaries/50-231107.pdf
Optional literature
- IMF, 2010, "Making Over-the-Counter Derivatives Safer: The Role of Central Counterparties"
- Economist, 2012, "Centrally cleared derivatives: Clear and present danger"