Pre-conference seminars 7th November 2011
Seminar 1- CVA Modelling: New features and developments
Seminar 2 - Model risk and model validation

Seminar 1: CVA Modelling: New features and developments
Led by Damiano Brigo, Gilbart Chair of Financial Mathematics, KING'S COLLEGE, LONDON

 8.30 Registration and coffee

 9.00 Understanding CDS and Bonds

• Credit Default Swaps (CDS)
• Corporate Bonds
• CDS Big Bang

 9.30 Single name credit models

• Reduced Form, hazard rate and Intensity; Deterministic intensity: piecewise constant or linearCalibration
• CDS's with examples: Parmalat and Lehman
• Hints at stochastic intensity modelling
• Firm Value Models and CDS calibration

10.00 Morning break

11.00 Multi name reduced form models and copulas

• Introduction to copulas
•  Gaussian copula
•  Other Copulas: t-Copula. One factor Gaussian Copula.
• Hints at use of Copulas for CDO's and problems
• Dynamic Loss models:
•  Hint at GPL model for simultaneous
•  CDO tranche calibration across attachments and maturity.

 13.00 Lunch

 14.00 Counterparty risk CVA: Introduction

• Unilateral CVA and unilateral DVA
• Default modelling
• Exposures

 14.30 Bilateral CVA

• General formula for bilateral CVA
• Impact of closeout conventions
• Contagion
• First to default risk

 15.30: Afternoon break

 16.00 Arbitrage free CVA Pricing across asset classes

• Impact of volatilities and correlations
• Subtleties in Wrong way risk profiles
• Counterparty risk CVA on Rates, Commodities, Credit and equity
• Interest Rate derivatives: CVA on interest rate swaps with nett
• Commodities: CVA for oil swaps
• Credit Derivatives: CVA on credit default swaps
• Equity: CVA on Equity Return Swaps
• Wrong way risk in all the above cases
• Precise valuation VS Basel deduced multipliers

 17.00 Netting, collateral and re-hypotecation in CVA calculations

 17.30 End of seminar

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Seminar 2
Model risk and model validation
Led by Massimo Morini, Coordinator of Model Research, BANCA IMI

9.00 Model Risk and Validation - Foundations

• Lessons from the past crises
• The Price approach vs the Value approach
• Model Risk and Fair Value accounting
• The Regulators: new indications for Model Validation
• From theory to practice: a practical scheme for Model Risk Management.
  
  

10.00 Morning break

10.30 Using different models for Model Validation

• Measure the range of reasonable prices to quantify model risk
• Construct parametric families of models
• Practical Example on Gap Risk with Structural vs Reduced-form models.

13.00 Lunch

 14.00 Stress-Testing Design and Pitfalls to avoid

• Using Market Information to design Stress-Tests. Practical example on Correlation Skew
• Using Historical information to design stress-tests in illiquid markets. Practical example from credit: mapping for bespoke portfolios
• Pitfalls in Stress-Testing. When the model breaks down. Practical example on copulas for liquidity risk, dynamic Var, wrong-way risk.

15.30 Break

16.00 Case Studies 

• Understanding model evolution to prevent model losses. How the interest-rate consensus model broke down when the basis spreads exploded. Detecting when an assumption becomes invalid.
• Hedging. The limits of pricing models when applied to hedging. The validation of a real hedging strategy. Practical example: Local Volatility Models vs Stochastic Volatility Models for Equity options
• Validating an approximation. Monitoring quantitatively the reliability of an approximation. Examples from interest rate modelling: swaption volatilities in the Libor market model and convexity adjustments.
• When the problem is the payoff. The dramatic consequences of payoff misunderstanding. Examples on index options and bilateral counterparty risk.

17.30 End of seminar

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