AWS Certified Associate Exams On Sale



Sarbanex-Oxley SOX Act 2002

Sarbanex-Oxley SOX Act 2002, is an act from U.S government as a measure towards restoring the public confidence in publicly listed companies.It was in 2002 that bankruptcy of three major corporations Enron, Worldcom, Global Crossing happened.
So, it was felt that there should be some legislation auditing the function of companies listed publicly in U.S.A.As a measure SOX legislation was formulated.It focusses on improving the structure for corporate governance and control.SOX act comprises of the following key provisions:
1) Creation of a new regulator
2) Certification by CEO’s and CFO’s
3) Ban on non-audit consulting services
4) Independence of audit committee
Operational risk framework of an organization can be built upon the principles published in Basel in February, 2003. In this article organization refers to banks.
1) Board Approval – Operational risk should be defined and approved. Board of directors should be aware of the major aspects of the bank’s operational risk. Operational risk should be categorized as a distinct risk category and should be managed. Framework should provide firm-wide definition of operational risk (enterprise risk management). Just like risk management in project management, operational risk should be identified, assessed (quantified), monitored and controlled(unavoidable)/mitigated(effect can be reduced).
2) Independent internal audit – Firms operational risk framework should be subjected to effective and comprehensive internal audit by well trained competent staff. Board of directors should make this a practice. It should be noted that audit team is not responsible for the operational risk management. IT is the direct responsibility of Board of directors.
3) Management implementation – Senior management is responsible for implementing operational risk management framework. It should be approved by the board of directors. The framework should be implemented taking firmwide risk management into consideration. It should be implemented in a consistent fashion and all staff should be aware of their responsibility towards operational risk management. In addition, Senior management is responsible for developing policies, procedures, processes for managing operational risk in all of the banks products (credit loans), activities(credit, debit,transaction processing,overdraft,loan,structured financing), processes (CMM, SOXimplementation), systems(IT,depratments)
4) Risk identification and assessment – Risks in existing material products, activities,processes,systems should be identified. When planning for a new material product,process, activity, system it is responsibility of senior management to identify risks and create risk management plan which will be subsidiary plan of project management plan. It should be approved by board of directors. Risks should be identified and assesses subsequently.
5) Risk monitoring and reporting – Processes and systems should be implemented to monitor and report risk on a regular basis and senior managers and board of directors should be given this information so that they can make proactive decisions. In many corporations VaR (Value At Risk) has been used as a standard metric to measure risk. It is computed based on certain mathematical models. Recent September 2008 crash cases show that regular meetings to discuss status in addition to VaR metrics will be the best risk management tool. Goldman Sachs followed this procedure and they were able to withstand the crisis.
6) Risk mitigation and control Policies and procedures should be formulated and implemented to control/mitigate operational risk. Risk profiles should be created and reviewed on a regular basis. Periodic review of risk limitation and control strategies is needed.
7) Contingency and continuity planning – Contingency reserve in Project management terms is the amount set aside to meet known risks. Contingency plans and business continuity plans(BCP) should be well documented and set in place to ensure effective functioning of existing systems and limit losses in case of crisis.
8) Disclosure – Sufficient public disclosure is needed. This allows the market participant to assess their approach to operational risk management.

Operational Risk and Sarbanes Oxley SOX 404 Principles

Corporate firms operate under complex systems and processes. There are many instances wherein the system can fail. Risk associated with failure of system and people as a whole/ failure of people and systems is generally categorized as operational risk.In general, any risk other than market risk and credit risk is an operational risk.
Operational risk framework of an organization can be built upon the principles published in Basel in February, 2003. In this article organization refers to banks.
1) Board Approval – Operational risk should be defined and approved. Board of directors should be aware of the major aspects of the bank’s operational risk. Operational risk should be categorized as a distinct risk category and should be managed. Framework should provide firm-wide definition of operational risk (enterprise risk management). Just like risk management in project management, operational risk should be identified, assessed (quantified), monitored and controlled(unavoidable)/mitigated(effect can be reduced).
2) Independent internal audit – Firms operational risk framework should be subjected to effective and comprehensive internal audit by well trained competent staff. Board of directors should make this a practice. It should be noted that audit team is not responsible for the operational risk management. IT is the direct responsibility of Board of directors.
3) Management implementation – Senior management is responsible for implementing operational risk management framework. It should be approved by the board of directors. The framework should be implemented taking firmwide risk management into consideration. It should be implemented in a consistent fashion and all staff should be aware of their responsibility towards operational risk management. In addition, Senior management is responsible for developing policies, procedures, processes for managing operational risk in all of the banks products (credit loans), activities(credit, debit,transaction processing,overdraft,loan,structured financing), processes (CMM, SOXimplementation), systems(IT,depratments)
4) Risk identification and assessment – Risks in existing material products, activities,processes,systems should be identified. When planning for a new material product,process, activity, system it is responsibility of senior management to identify risks and create risk management plan which will be subsidiary plan of project management plan. It should be approved by board of directors. Risks should be identified and assesses subsequently
5) Risk monitoring and reporting – Processes and systems should be implemented to monitor and report risk on a regular basis and senior managers and board of directors should be given this information so that they can make proactive decisions. In many corporations VaR (Value At Risk) has been used as a standard metric to measure risk. It is computed based on certain mathematical models. Recent September 2008 crash cases show that regular meetings to discuss status in addition to VaR metrics will be the best risk management tool. Goldman Sachs followed this procedure and they were able to withstand the crisis
6) Risk mitigation and control Policies and procedures should be formulated and implemented to control/mitigate operational risk. Risk profiles should be created and reviewed on a regular basis. Periodic review of risk limitation and control strategies is needed
7) Contingency and continuity planning – Contingency reserve in Project management terms is the amount set aside to meet known risks. Contingency plans and business continuity plans(BCP) should be well documented and set in place to ensure effective functioning of existing systems and limit losses in case of crisis
8) Disclosure – Sufficient public disclosure is needed. This allows the market participant to assess their approach to operational risk management

FRM AIM: Describe the mechanism of delivery process and contrast with cash settlement

FRM AIM: Describe the mechanism of delivery process and contrast with cash settlement

Delivery

Refers to closing out f contract where the trader who has short position in the contracts sells the agreed upon asset and the trader who has the long position in the contract buys the asset
For cash settlement delivery is not an option and position marked to market based on price on the last settlement price
Delivery can take on the floor of the exchange and also away from the clearinghouse where the two parties contact privately and close out the deal. After the trade is closed out the parties have to inform the clearinghouse about the transaction
As an aspiring financial candidate it becomes mandatory to have an overview of different career options available in financial sector particularly investment banking and related arena before choosing a financial certification. As a measure to bridge this gap trainerslisting.com will be presenting interesting articles on different financial career options. Here is the simple chart from CSI that talks about much of these

https://www.csi.ca/student/en_ca/careermap/index.xhtml
Relate Significant market events of the past several decades to the growth of risk management industry I :
Several significant events have occurred in the past that has affected the common man, financial institutions and business that has led to huge financial loses.

Some of the significant events in the past are as follows:

Black Monday of 1987 that saw a sharp decline in U.S stock price for a single day
Asian equity markets decimation of 1997
Russian default of 1998
2001 September world trade attack
Sub mortgage crisis that started on 2007 and whose impact is felt even today
These events remind us that it is even more important to use financial risk management policies and practices to insulate ourselves from future financial losses.
Calculate an arbitrage payoff and describe how arbitrage opportunities are ephemeral (i.e., short lived):

Arbitrage is a kind of hedging technique used in investment management.
In general simultaneous selling and buying of stocks to offset losses is referred to as arbitrage. sometimes it helps us achieve profit with less risk.

FRM AIM: Calculate an arbitrage payoff and describe how arbitrage opportunities are ephemeral (i.e., short lived)

Speculators

  • Take positions in the market to profit from the positions
  • There might be large gain/loss when speculators use futures as a hedge against the underlying securitys
  • The maximum loss when speculators use options as hedging strategy is limited to the cost of the option itself

Arbitrageurs

  • Use derivatives to earn risk free profit in excess of risk free rate by manipulation of mispriced securities
  • Riskless profit is earned by entering into equivalent and offsetting positions in markets
  • Opportunities do not last long since supply and demand will quickly eliminate the arbitrage situation

Risk from Derivatives

FRM AIM: Describe some of the risks that can arise from the (mis) use of derivatives

  • Traders use to speculative instead of hedging the derivatives (Operational Risk)
  • Loses suffered using hedging, speculation, arbitrage is high
  • Control mechanism needed to monitor risk that arises out of hedging, speculation, arbitrage opportunities

FRM AIM Define:

  1. Derivatives
  2. Market Maker
  3. Spot, Forward, Future contract
  4. Call, Put option
  5. American, European option
  6. Long, Short position
  7. Exercise (strike) price
  8. Expiration(Maturity) date
  9. Bid, Offer price
  10. Bid-Offer spread
  11. Hedgers, Speculators, Arbitrageurs

 

Derivative

  • Derives its value from underlying security value
  • Ex: Options, Forward, futures contract

Market Maker

  • Individual who acts as a middleman between exchange and end user
  • Buys and sells security
  • Charges fees based on the services offered

Spot Contract

  • Agreement to buy/sell asset today
  • No legal binding agreement in the contract

Forward Contract

  • Contract to buy/sell asset at a predetermined prices and at predetermined date in the future
  • No legally binding agreement in the contract

Future Contract

  • Legally binding agreement to buy/sell asset at a predetermined price at a predetermined date in the future
  • Ex: Buy/Sell of commodities in the future like jet fuel

Call Option

  • Buy a specified number of shares of an underlying security on/or before the expiration date at a given strike price
  • Used for hedging, speculative, arbitrage purposes

Put Option

  • Sell a specified number of shares of an underlying security on/or before the expiration date at a given strike price
  • Used for hedging, speculative, arbitrage purposes

American Styled Option

  • Similar to call/put option except that the option can be exercised anytime between issue date and expiration date
  • Valuable at times when right to exercise early will bring in profit

European Styled Option

  • Similar to call/put option except that the option can be exercised only at expiration date
  • Valuable when right to exercise early doesn’t bring in any profit

Long Position

  • Individual who has long positions owns/buys the security in the near future
  • Investor who owns long position anticipates increase in the value of the security in the near future

Short Position

  • Individual who has short positions sells the security in the near future
  • Investor who owns short position anticipates decrease in the value of the security in the near future

Strike Price

  • Price at which the underlying security may be bought/sold

Expiration Date

  • Date at which the option may be exercised (bought/sold)

Bid/Quoted price

  • Price at which the buyer is willing to pay for the security

 

Offer/Asking price

  • Price at which the seller is willing to sell the security

Bid-Ask Spread = Asking Price – Bid Price

 Hedgers

  • Use forward, futures, option to reduce their risk of the financial security that they have
  • Usage of forward contracts, the hedgers neutralizes risk by paying the price of the underlying security
  • Usage of options is used as an insurance policy

Arbitrageurs

Take offsetting positions in financial markets to lock in a risk less profit
FRM AIM: Define and Describe key features of futures contract

Futures Contract

  • Highly standardized contract specified by exchange
  • The person who buys/sells futures contract is obligated to buy/sell the assets at agreed upon time and at agreed upon price
  • Futures contract is used by speculators who take advantage of price fluctuations of the underlying asset to get a profit
  • Futures contract is used by hedgers to reduce the risk of the underlying asset

Characteristics of Futures Contract

  • Price quotation
  • Contract Size
  • Quality of asset
  • Delivery Time
  • Delivery Location
  • Position Limits
  • Daily Price Limits

FRM AIM: Describe the over the counter market and how it differs from trading on an exchange, including advantages and disadvantages :

FRM AIM: Describe the over the counter market and how it differs from trading on an exchange, including advantages and disadvantages

Properties Over the Counter Market Traditional Exchange
Definition Uses telephone and computers to make trade Uses shouting and hand signals to make trade
Size Bigger than traditional exchange Smaller than OTC market
Terms of contract Not specified by exchange Specified by exchange
Can participant negotiate contract Yes No
Any type of risk involved Credit Risk No Credit Risk
How issues are resolved Calls are recorded during transactions which serves as a reference in any disputes  

Issues are resolved based on contractual terms agreed during trading

FRM AIM: Describe, contrast and calculate the payoffs from hedging strategies involving forward contracts and options :

FRM AIM: Describe, contrast and calculate the payoffs from hedging strategies involving forward contracts and options 

Properties Forward Contracts Options
Purpose Eliminate or reduce financial exposure Eliminate or reduce financial exposure
Investor with Long exposure to asset Hedge the exposure by entering into short futures contract Hedge the exposure by buying a put option
Investor with Short exposure to asset Hedge the exposure by entering into long futures contract Hedge the exposure by buying a call option
Advantages No initial investment in executing these contracts Initial premium to purchase options
Disadvantages Hedgers give up price movements that has a positive effect in event the position is left un hedged The price movement that has a positive effect on the options is used by the hedgers to earn a profit