Financial Risk Management Essentials
DESCRIPTION
This program helps participants build fundamental skills that will enhance their ability to (1) identify the nature and scope of financial risks to which their clients are exposed, (2) understand the strategy that clients employ to manage such risk, and (3) evaluate the degree to which various alternatives may be used to manage that risk. Participants are exposed to the most common risk management techniques used by corporations, specifically the products and services used by the bank to serve this need. The emphasis will be on the importance of providing solutions rather than selling products.
Risk management techniques will include swaps, forwards, and options. Alternative solutions will be compared and contrasted from the perspective of clients, in order to arrive at the optimal client coverage strategy. Participants will enhance their ability to recognize the risk management requirements and decision-making criteria of their clients, and to understand the alternatives available to meet those needs. A number of corporate situations and deal examples will be used as the basis for each section’s discussion.
As a critical foundation and refresher course, this program is intended to ensure that relationship managers understand the parameters of risk and can build corporate finance insight into a dialogue with clients, based on available capital markets alternatives. That perspective will help participants in later programs to identify, analyze, and refine their understanding of the needs, priorities, and thoughts of clients. That sets the participant up to become a trusted advisor during the structuring, pricing, and closing process.
TARGET AUDIENCE
- This program is intended for corporate banking relationship managers, product specialists, and line managers who work with clients to find effective solutions for financial risk management. It will focus on tools and strategies to manage financial risk, as well as using market conditions to create favorable financing opportunities.
OBJECTIVES
Participants who successfully complete this course will be able to:
- Understand the link between business strategy and financial needs and objectives.
- Understand the issuer perspective in managing risk.
- Understand the financial risk management policies and strategies of corporate clients.
- Compare and contrast alternative approaches to risk management.
- Define and measure a corporate client’s financial exposures and evaluate strategies for managing their potential impact on earnings and cash flow.
- Evaluate the risks to a corporate client from domestic and international projects that may be underway and/or planned.
- Evaluate the risks to a corporate client of the financial instruments in its portfolio and understand various techniques to manage those risks.
- Evaluate the risks of derivatives entered into by the client.
- Understand the use of credit derivatives and securitization as part of a risk management program.
PREREQUISITES REQUIRED
Participants should have completed intermediate courses (or be conversant with the subject matter) in: Pricing Cash Flows, Fundamental Financial Mathematics, Corporate Financial Strategy, and Capitalization Alternatives.
PRE-READING
Individuals will receive a briefing package for one of two “Comprehensive Case Studies” which will be completed in teams during the workshop. The briefing package will include detailed company financial information, as well as an overview and setting for the case. Participants are expected to have a full working knowledge of the company’s business and financial setting by the time the workshop begins.
It is imperative that this background information be reviewed prior to the session. Participants should arrive at the session prepared to discuss the specific needs of their selected client and to assist in identifying the needs of the other selected clients.
- Objectives
- Background and purpose
- Review of key concepts in corporate financial strategy
- The role of derivatives in the capital markets
- Uses of derivative products o Hedging operating results o Optimizing financing o Strategic risk management o Enhancing revenue
- The role of the yield curve
- Relationship among various markets o Cash market o Exchange-traded o Bank (over-the-counter) products
- Yield curve and foreign exchange relationships
- Symmetrical hedging products
- Asymmetrical hedging products
- Matching objectives with tools
- Impact on financial objectives o Shareholder value o Cash flow o Capital structure
- Identifying types of exposure o Transaction exposure o Translation exposure o Competitive exposure o Economic exposure
- Which risks should be managed?
- The importance of “view” o Market view o Client view o Portfolio view
- Determining the relative importance of a given financial risk
- The role of the banker
- Yield Curve Dynamics: Par, Zero-Coupon, and Forward rates
- Applications to fixed-income valuation o Duration o Convexity
- Swap fundamentals o Using FRAs to price swaps o Floating cash flows o Marking to market o Repricing a swap o Early swap termination
- Applications of swaps o Hedging o Restructuring the balance sheet o Comparative advantage financing
- The role of banks
- Performance risk in swaps
- Variations on basic swaps o Asset swaps o Money market swaps o Swaps with changing notional amounts o Step-up/step-down swaps o Mark-to-market structures o Option-based swaps
- Questions and answers about the day before
- Issues to review regarding Comprehensive Cases
- Review of option pricing fundamentals
- Interest rate options
- Caps, floors and collars
- Swaptions
- Payout profiles
- Analyzing different option strategies
- Break-even analysis
- Application to bonds o Callable/puttable bonds o Option-adjusted spread
- Simple hedging strategies
- Combining multiple options
- Cylinders (range forwards)
- Participating structures
- Put and call spreads
- FX hedging strategies
- Structure and mechanics of complex options
- Combinations of complex options
- Relationship between FX forwards and currency swaps
- Issuer and investor applications
- Matching cash flows on bond issues
- Accessing the market of comparative advantage
- Questions and answers about the day before
- Issues to review regarding Comprehensive Cases
- Segmenting clients for risk management purposes
- Developing the relationship
- Qualitative factors that influence hedging decisions o flexibility, complexity o liquidity o visibility
- Quantitative factors o cost o performance risk o market expectations
- Tax and accounting issues (summary)
- Alternatives comparison matrix
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