Three new posts at the Finance Training Course portal this week that broke the popularity graph.

Continuing Profession Education (CPE) online learning solutions for actuaries

Stress testing crash course for Board of Directors and Board Risk Committee members

Cross selling treasury products

Two new online video based courses – The Stress Testing, ALM and Capital Adequacy Crash Course and the shorter and more cost effective ALM and Capital Adequacy Crash Course are live and available for purchase.

In over six hours of video based instruction the two courses cover the following topics

The Stress Testing, ALM and Capital Adequacy Crash Course

1. The need for stress testing
2. Stress testing capital
3. Stress testing methodology
   1. Price Risk
   2. Credit Risk
   3. Interest Rate mismatch & ALM
   4. ALM reports and extending them

Annexure and related topics

1. Using Value at Risk – the Value at risk course
2. Understanding Capital
3. Understanding Capital Adequacy
4. Understanding Duration and Convexity

The ALM and Capital Adequacy Crash Course

1. Introduction to ALM
2. Interest Rate mismatch & ALM
3. ALM reports and extensions
4. Evolution of Capital Adequacy requirements
5. A review of ICAAP (Internal Capital Adequacy Assessment Process) and Basel II (III) – Liquidity risk adjustments

Annexure and related topics

1. Using Value at Risk – the Value at risk course
2. Understanding Duration & Convexity

Across 200,000 pageviews and 90,000 visitors here is a list of our top 29 posts over the last 8 weeks at Finance Training Courses. The posts cover the impact of US credit rating downgrade, basics of derivative pricing, ICAAP, dissecting gold models, business plan pitches, credit derivatives, structured products, counterparty limits, correlations, a first course in corporate finance, stress testing and treasury operations. Enjoy

In our last article on Gold relative value: using commodity mispricing to forecast gold prices , we reviewed a number of possible drivers for the rise in the value of Gold. This article is an extension of the same discussion on gold with some additional supporting datasets and graphs.

Our first argument and model was relative value and the suggestion that the rise was somewhat proportionate to the change and purchasing power parity of the US dollar. As a proxy for this effect we used the Swiss Franc to measure the relative depreciation of the US dollar and its subsequent impact on the price of Gold. Starting May 2010 if we use the Swiss Franc (CHF) as our stable currency, the graph below shows the change in price of Gold based on the appreciation of the Franc against the US dollar.

For such a simple model, the direction of the forecasted trend was actually quite accurate and the model error (fit) other than four spikes in the middle of the data set remained around 6% with a standard deviation of 4%.

However the biggest issue with the model was its inability to fit the data set over the last 6 years. While the model worked on average over the last 16 months, its performance over the four years prior to the fit was quite dismal.

A crude tweak fixed the performance by recalibrating the model to market every 6 – 12 months. We show the 12 month tweak but as you reduce the “calibrate to market” period the performance of the model would certainly improve.

A second alternate was to use trailing correlations between a stable currency pair and gold prices to determine the projected price path for Gold. Agnes in her post describes and provides the background material for building the Gold relative mis-pricing model using trailing correlations. The graph below shows the fit of this model to actual historical gold prices.

Once again while the fit for the initial model was a little weak, a few excel spreadsheet based tweaks created a much better fit model.

A third alternate was to base the change in price of Gold to the increase in trailing volatility for the two major reserve currency pairs – the USD against the Euro. One common argument is the replacement of reserve currency argument. The argument suggests the reason why investors are reducing the exposure to the Euro is on account of the dramatic change in its value over the last 18 months and the likelihood and continuation of the same trend in the near future. However as we plot trailing volatilities, there is no clear trend or direction between the change in the value of trailing volatility and Gold prices.

Here is the model we used last year to dissect the projected price behavior of oil. This was a fundamentals driven model that examined supply and demand gap, future supply sources and shocks, core demand growth drivers and relative value effects. The same approach was used later this year in building our fundamentals driven model for gold price forecast.

Our summarized outlook was simple. Oil demand growth is likely to remain stunted given high prices and a number of major issues structurally which will remove any impetus for an oil price shock similar to the one that we witnessed in 2008. With additional supply coming back to the market from Iraq and Libya, Europe struggling with the fallout of the PIGS crisis and the slowdown in China the demand situation was not likely to be rosy.

The original dated note is available on request. Please drop me a line if you would like to receive a complimentary electronic copy.

Short half day and full day format applied and corporate finance training courses coming soon to the Capital Club at DIFC in Dubai (UAE) and locations in Abu Dhabi and Al-Ain in collaboration with our DIFC Partners, Kinetrix Limited. Courses cover a range of hands on practical topics from treasury risk to project finance, from interest rate modeling to understanding commodities risk.

A joint venture managed by

.For our portfolio of financial services customers in the region and beyond.

Three courses, three outlines, one happening location

While Alchemy Technologies offers a portfolio of more than 20 domain specific treasury, risk and derivative pricing topics, the outlines below represent our most popular course offering.

Commodity Trades & Risk Management

The rising volatility in precious metals, petrochemicals and agricultural products has created an unprecedented opportunity to profit from market price movements. On the risk front there is a need to understand the impact of this volatility on trades, transactions and desks. By the end of this two day workshop participants will be able to:

1. Appreciate the linkage between commodity markets (precious metals, crude oil), currencies and rates
2. Trace the impact of monetary policy announcements on commodity markets
3. Explain trading strategies using futures, options and exotic products
4. Understand trading triggers
5. Derive risk limits for counterparty exposures

Project Finance – Concepts and Applications

The workshop is aimed at account managers, bankers, risk managers, credit analysts and students interested in building a stronger understanding of the project finance space. At the end of this two day hands on workshop participants will be able to:

• Understand the unique characteristics, benefits and issues associated with Project Finance.
• Compare project finance with conventional corporate finance using a power system expansion case
• Understand the role and importance of Project Finance in infrastructure and large scale investment projects and the role of Project Companies (SPVs) in Project Finance.
• Identify key project risks and understand the techniques for mitigation of such risks in Power and Infrastructure project space.
• Use Montecarlo simulation to test core assumptions, value drivers and linkages between interest coverage and capital structure of the SPV.

We achieve these goals by creating an opportunity for students to step into the shoes of all major stakeholders (sponsors, financiers, lenders, beneficiaries and managers), apply the primary principals of project finance, sensitivity analysis and risk mitigations on specific historical transaction and get comfortable with the concept of using project companies to align incentives. The course combines hands on model building, presentation, analysis and the application of creative thinking to structuring transactions and has a heavy case and workload.

Treasury products crash course

The workshop is aimed at non-treasury customer facing team members who work as facilitators and relationship managers between Treasury customers and the Treasury function at a bank.

The primary objective of this workshop is to help relationship, risk and limit managers better understand transaction, limits and pricing mindset from a Treasury point of view. Armed with this awareness and knowledge they can help customers understand the rationale behind a treasury price quote, leading to a quicker close and a higher yield on customer treasury transactions.

By the end of this workshop participants will be able to

• Explain primary treasury products, processes and functions of a treasury department to a non-treasury outsider.
  
• Work with pricing examples across basic treasury products including both Money Market and FX products.
  
• Follow the workflow of treasury operations and identify common exceptions and solutions from rate quotation to settlement.
  
• Identify suitable treasury products for specific customer needs involving Money Market and FX transactions.
  
• Calculate counterparty limits using PSR and PFE methodology.
  

About Kinetrix

Kinetrix is one of the leading providers of Governance, Risk and Compliance (GRC) advisory services. It provides a front to back service offering including Strategy and Operational Formulation, built on robust GRC frameworks.

Kinetrix is recognized as a thought leader aligning in depth experience, expertise and business philosophy to create efficient, growing and sustainable businesses for its clients from start ups SMEs, Large Corporations, Family Businesses and Governments. Headquartered in the prestigious Dubai International Financial Centre (DIFC) we pride ourselves in our strong record of service delivery, client driven approach, professional excellence and understanding of local market needs. Our network of offices and affiliates spans the region and to complement our service offenng to our clients. Kinetrix has selected strategic partners (such as Complinet) to provide additional valued expertise, technology products and service excellence.

About Alchemy Technologies

Founded in 2003, Alchemy has grown to be one of the leading Enterprise risk and Actuarial firms in the region with a portfolio of several blue chip customers. Alchemy’s enterprise, treasury and Basel II risk solutions have all been built over the last 6 years with feedback from International and local industry user groups.

The firm has won multiple product recognition awards including the MIT Business Acceleration Plan runners-up Award, the PASHA ICT Award for Best Financial Application as well as the Asia Pacific ICT Finalist for the Best Financial Application Category. Our products have now been show cased in Pakistan, Thailand, China, Malaysia, Singapore, Macau and the Middle East.

Alchemy’s product offerings include Risk Management and Treasury Management solutions, Obligor and Facility Risk Rating platforms, Financial Institution (FI) Limit Allocators, PD Calculators, custom financial model development and audits, interactive workshops, risk and actuarial advisory, Basel II compliant risk solutions for banks, insurance companies and portfolio managers.

1.0 Commodity Trades & Risk Management

The rising volatility in precious metals, petrochemicals and agricultural products has created an unprecedented opportunity to profit from market price movements. On the risk front there is a need to understand the impact of this volatility on trades, transactions and desks. By the end of this two day workshop participants will be able to:

• Appreciate the linkage between commodity markets (precious metals, crude oil), currencies and rates
• Trace the impact of monetary policy announcements on commodity markets
• Explain trading strategies using futures, options and exotic products
• Understand trading triggers
• Derive risk limits for counterparty exposures

2.0 Project Finance – Concepts and Applications

The workshop is aimed at account managers, bankers, risk managers, credit analysts and students interested in building a stronger understanding of the project finance space. At the end of this two day hands on workshop participants will be able to:

• Understand the unique characteristics, benefits and issues associated with Project Finance.
• Compare project finance with conventional corporate finance using a power system expansion case
• Understand the role and importance of Project Finance in infrastructure and large scale investment projects and the role of Project Companies (SPVs) in Project Finance.
• Identify key project risks and understand the techniques for mitigation of such risks in Power and Infrastructure project space.
• Use Montecarlo simulation to test core assumptions, value drivers and linkages between interest coverage and capital structure of the SPV.

We achieve these goals by creating an opportunity for students to step into the shoes of all major stakeholders (sponsors, financiers, lenders, beneficiaries and managers), apply the primary principals of project finance, sensitivity analysis and risk mitigations on specific historical transaction and get comfortable with the concept of using project companies to align incentives. The course combines hands on model building, presentation, analysis and the application of creative thinking to structuring transactions and has a heavy case and workload.

Hand on Cases:

HBS Case: Calpine Power: From Project Finance to Corporate Finance

HBS Case: Asia Japan Cable

HBS Case: Chad Cameron Oil Field Development and Pipeline

3.0 Treasury products crash course

The workshop is aimed at non-treasury customer facing team members who work as facilitators and relationship managers between Treasury customers and the Treasury function at a bank.

The primary objective of this workshop is to help relationship, risk and limit managers better understand transaction, limits and pricing mindset from a Treasury point of view. Armed with this awareness and knowledge they can help customers understand the rationale behind a treasury price quote, leading to a quicker close and a higher yield on customer treasury transactions.

By the end of this workshop participants will be able to

• Explain primary treasury products, processes and functions of a treasury department to a non-treasury outsider.
  
• Work with pricing examples across basic treasury products including both Money Market and FX products.
  
• Follow the workflow of treasury operations and identify common exceptions and solutions from rate quotation to settlement.
  
• Identify suitable treasury products for specific customer needs involving Money Market and FX transactions.
  
• Calculate counterparty limits using PSR and PFE methodology.
  

Facilitator profile

Jawwad Ahmed Farid is a Fellow Society of Actuaries (Chicago), a MBA from Columbia Business School (New York City) and a computer science graduate. During the last 19 years, he has worked as a consultant in North America, Pakistan and the United Kingdom with a number of blue chip clients including Hartford Life, Aegon, American General, Goldman Sachs, ING, Manu Life, Merrill Lynch, Met Life, Sun America, Nationwide, Sumitomo Mitsui Bank, Sun Life of Canada, Pacific Life, AllState, Fidelity Investments, Transamerica, Skandia, GE Financial Assurance, AXA Equitable and Washington Mutual Bank.

Jawwad’s core areas of expertise include Asset/Risk Management, Investments, Product Development & the Financial Services Back Office. Jawwad blends a rare combination of risk management, information systems, international standards, business and product development skill set side by side with his actuarial expertise. He is the author of three books on Entrepreneurship (Reboot), Commodity Markets (Understanding Commodities Risk) and Risk Management (Risk Application and Frameworks).

As an investment advisor Jawwad has advised a 3 billion US$ dollar life insurance fund in Pakistan on allocation and bid patterns for 10, 20 and 30 year bonds, a 30 million dollar Middle East fund on their ALM mismatch and fixed income strategy, a 10 million dollar fund on asset allocation and equity market timing in Pakistan. He has also worked with the securities regulator on assessing the state of the corporate bond market as well as issued valuation opinions on cross currency swaps, interest rate swaps, caps, floors, participating forwards and contingent liabilities for Exchange Guarantee Funds in the region.

Jawwad has worked directly as a founder, founding team member, mentor and advisor at multiple startups including two green field life insurance companies, multiple technology product businesses, financial services consulting operations, risk and investment advisory businesses, product focused distribution as well as micro insurance, micro pensions and micro finance startups.

In addition to being a PASHA CEC member and Treasurer he has also served as a judge at the Asia Pacific ICT Awards in Macau, Singapore, Kula Lumpur and Jakarta as well as at PASHA ICT Award in 2006, 2007, 2008, 2009, 2010. He currently serves as member of the oversight board for the PASHA Social Innovation Fund.

His regional client list includes First Gulf Bank, Riyad Bank, Ministry of Finance Malaysia, May Bank, Dubai Islamic Bank, Noor Islamic Bank, Dubai Bonds, Deutsche Bank, SP Jain, Marcus Evans, LSW International, State Bank of Pakistan, National Bank of Pakistan, Muslim Commercial Bank, Crescent Commercial, MyBank, Dawood Islamic Bank, KASB Bank, United Bank Limited, Pak-Kuwait Investment, Saudi Pak Commercial Bank, ABN AMRO, State Life Insurance, Dawood Family Takaful, Asia Health Care, Adamjee Insurance, Shell Pakistan, and International General Insurance.

The Capital Club, DIFC, Dubai, UAE

The Capital Club is Dubai’s premier private business club offering an elegant and welcoming ambience in which to mix and meet, to exchange ideas and to entertain guests. The Club is committed to the highest levels of comfort and cuisine, exceptional events and an unmatched level of personal service, at home and abroad.

Calendar, Dates and Timelines

Short half day, full day and two day formats starting end of October till early December covering Derivative Pricing, Interest Rate Modeling, Montecarlo Simulations, FX Derivatives, Quant Crash Course, Treasury Risk, Project Finance and Commodities Risk Models.

For details, fees and registration

Mr. Faheem Aziz, Kinetrix Limited, DIFC, Dubai – faheem.aziz@kinetrix.com

Mr. Jawwad Farid, Alchemy Technologies Pvt. Ltd, Karachi – jawwad@alchemya.com

Also see

Risk and Treasury Online Training Courses at Finance Training Courses Portal

Risk and Treasury Training Courses at DIFC, Dubai and the Capital Club

Please see our previous two posts on the US credit rating downgrade posted earlier on Finance Training Course. The first post is an initial announcement and gut check, while the second reviews analysis published over the last 48 hours in global media supplemented by our opinions and outlook.

US Credit Rating Downgrade Day One – Commodities Outlook for Monday

US Credit Rating Downgrade End of Day One – Impact on Commodities and Financial Markets – Analysis

All eyes on Tokyo and Singapore open to get a sense on trading direction for the US$, precious metals and crude oil. Somewhere over the next six hours we will get a sense of how investors have digested the rating downgrade news from New York and DC over the weekend.

For now according to the Wall Street Journal, DTCC, OCC and ICE have all indicated that there Treasury valuation models, collateral rules and hair cut requirements will not change when it comes to AA+ rated US treasury securities. Post the ECB and G7 conference Sunday evening, similar re-assuring statements are expected from ECB and G7 member countries. The ECB plan to buy European bonds this week should also fuel weakness in Euro which should counterbalance any depreciation of the US dollar against the Euro.

No spike in treasury sales is expected given reassuring noises made by all major sovereign investors in Europe, Middle East and Asia.

It will be interesting to see how LIBOR rates on dollar deposits move when market opens in Europe on Monday morning.

If equity market action in the Middle East (Dubai, Abu Dhabi, Saudi Arabia and Israel) is any indication, markets should drop anywhere from 3% – 7% today starting from Tokyo and ending in New York as speculative trades and unwound and investors move to safer assets (US Treasuries).

Some analysts are forecasting a $10 – $25 spike in the price of crude oil if the US dollar heads south.

For the last few months a simple trade in futures or options would have made you money. Buy puts on crude oil ETF’s as soon as crude oil crossed US$99 a barrel and sell them when crude oil fell beneath 92. Ride the opposite trade by buying calls as soon as you sold your puts.

Tonight the question is that will the same trade make you money or wipe you out completely as oil broke 88 dollars a barrel briefly and fell by more than 4% in a single day by early afternoon trading in NYMEX, New York.

Other than the US economic numbers, the central bank of Japan’s efforts to weaken the yen and strengthen the dollar, the worst possible news for oil over the next few days could only be the end of Colonel Qadafhi’ regime in Libya. While oil has been suffering a downward trend for the last 5 session, today and Friday’s futures trading would be dominated by the monthly rollover of Crude Oil ETFs on NYMEX.

As we walk through August, the primary bet will be if Oil will bounce back above 95 within the next 15 days or slide further towards breaching the 80 dollars a barrel benchmark.

Crude oil declined for a third consecutive day amidst speculation that OPEC shall raise its output quota. WTI crude futures fell by 0.53 percent to USD $ 98.490 a barrel. Brent crude futures fell by 0.45 percent to USD $ 113.96 a barrel.

The current high level of oil price has increased the idea that OPEC may increase its production output quotas, since individual OPEC members have expressed their concerns at different instances over a high oil price eroding the global demand of oil. Also, the International Energy Agency (IEA) has stated that it foresees an urgent increase in oil supply in order to bolster the demand of oil. OPEC members are scheduled to meet tomorrow in Vienna to discuss their current production levels. If OPEC decides not to alter its production quotas, then, it would send out a signal in the market that the current level of oil price is acceptable to them.

A report released tomorrow is expected to show that the level of crude stockpiles in the US has risen by 1 million barrels last week, a sign of a weak demand. Furthermore, the US economy is not putting up a healthy performance, with unemployment rising to 9.1 percent in May. This pessimistic outlook of the US economy also caused a drop in oil futures.

Gold futures rose on the back of pessimism regarding the recovery of the US economy. Gold futures rose by 0.63 percent to USD $ 1542.40 an ounce.

The US unemployment rate rose in May to 9.1 percent from its previous figure of 9.0 percent. There is a growing belief that the US Federal Reserve shall continue to maintain the interest rate between 0 and 0.25 percent in order to bolster the US economy. This has resulted in the US Dollar depreciating against major currencies, and has increased the demand of gold as a safe-haven.

Silver futures declined by 0.03 percent to USD $ 36.191 an ounce.

Oil futures fell by the biggest weekly amount in a month amidst news that the US Unemployment rate increased to its highest level this year. WTI crude futures fell by 0.18 percent to USD $ 100.22 a barrel.

The US Labour Department stated that the number of payrolls increased by only 54,000 in May, the smallest increase this year. The unemployment rate from 9 to 9.1 percent. For the first time in almost seven months, factories in the US cut down on the number of people employed by 5000, whereas the number of new jobs added in the retail, leisure and state and local governments also decreased in May. Further compounding this pessimistic outlook was a revised report from the US Commerce Department, which stated that the US economic growth in the first quarter of this year was a meager 1.8 percent per annum, down from the growth rate of 3.1 percent per annum in the previous quarter. This news has increased speculation about a decreased demand of oil in the US during the summer season, which has led to a fall in the price of oil futures.

Meanwhile, Brent crude futures increased by 0.26 percent to USD $ 115.84 a barrel. The Euro appreciated against the Dollar, which has resulted in commodities priced in the Greenback, such as Brent futures, appear more attractive to European investors. Thus, this increased demand for Brent futures led to its price hike.