Crash Course in Risk Management

  1. Market Risk
  2. Operational Risk
  3. Counterparty/Credit Risk

Market Risk

A typical Delta matrix (x-axis = vol level, y-axis = spot level) of a Long 1-month EURUSD 1.20 Call.
  1. Delta-Normal VaR
  2. Historical VaR
  3. Monte Carlo Simulation
  1. Standard Deviation (Volatility)
  2. Confidence Level
Credit: Fernando Caio Galdi, L.M Pereira
MC Simulation (1-day, vol = 16% , paths=500 , steps = 1000)

Operational Risk

  1. Trade Execution
  2. Post-Trade (trade lifecycle)
  3. Backoffice and cashflow
  1. Order execution — The client’s order is received by the front office sales desk of the broker/dealer. The order is fed (either via e-platform by the client or by the sales trader) to the firm’s risk/middle office systems.
  2. Risk Management —Once fed into the risk management system, the order is being assessed for margin and available equity in the account to withstand the risk level. After all, checks are done and cleared, the trade is sent to the exchange.
  3. Matching at the exchange — After the trade is sent to the exchange, it’s placed in the exchange order book, waiting for a match on the other side. Once a matching order is available, the client’s order is matched against that.
  4. Trade made — A new trade is born, now the exciting stage of post-trade begins with the exchange sending both parties’ brokerage firms a confirmation of the trade (so they could inform their clients).
  5. Trade confirmation — Now that the trade is made, both parties need to confirm the trade’s details in order for the process to continue. Without a matching of the details from both sides, the trade will not be able to be processed to clearing at the clearinghouse. Usually, trade needs to be confirmed until T+1 (1-day ) from the moment it’s matched.
  6. Clearing — Once the trade is confirmed by both parties, it needs to be cleared by the clearinghouse. The purpose of the clearinghouse is to make sure both parties meet their obligations. Trades are usually referred to as T+1, T+2 or T+3, where the ‘T’ refers to the transaction date (the date on which the trade was executed). On the settlement date, the sell-side must have transferred their security, and the buy-side must have transferred the money for their purchase.
  7. Settlement — At the end of the trade life cycle process, the day of settlement arrives. The settlement process is done within the clearinghouse, where the cash and securities are transferred between the parties’ accounts. At the end of the trade date, the clearinghouse will provide reports on settled trades to the exchanges and custodians.
Credit : Quora

Credit (Counterparty) Risk

Credit risk remedies — XVA

credit: Wikipedia
Credit : Bloomberg



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Harel Jacobson

Harel Jacobson


Global Volatility Trading. Python addict. Bloomberg Junkie. Amateur Boxer and boxing coach (RSB cert.)!No investment advice!