COURSE FEATURES

• Review the Investment Process: trade processing, settlement and clearance.
• Learn the Short-Term Market: Treasury bills, commercial paper, banker’s acceptance, CDs, repurchase agreements, Eurodollars, and agencies.
• Discuss the Capital Markets: fixed income securities – Treasuries, corporate bonds, zero-coupon bonds, asset-backed securities, mortgage-backed securities, municipals; equities – preferred, common, equity-linked notes.
• Study the Derivative Markets: forwards, futures, options and swaps, credit derivatives – credit default swaps, total return swaps.
• Discuss derivative case studies and current market issues.
• Discuss Investment and Derivative Risks: market, liquidity, legal, credit, operational, management, FX, interest rate, price, weather.
• Learn different types of basis risk: Locational, product, timing, and cash to futures.
• Review Alternative Assets: general partnerships structures, private equity, hedge funds, real estate funds.
• Develop techniques to audit complicated derivative strategies and to analyze risks within the strategies.
• Learn the roles and responsibilities of the front, back and middle offices of a typical investment and derivative environment and the key controls important in each area.

COURSE OUTLINE

Introduction to Course

• The CIDA Program
• Understanding the Exam and How to Study
• Review Course Topics and Objectives

A review of the Current Markets and Past Case Studies

Understanding the Investment Environment

• Introduction to the Investment Process
• Understanding the Short-term market
• Reviewing the Major Securities in the Capital Markets
• Understanding the Alternative Asset Class: Private Equity and Hedge Funds

Understanding the Cash Management and Debt Activities

• Reasons to Hold Cash in the Portfolio
• Best Practices for “Economizing” Cash
• Internal Controls in the Cash Management Process
• Best Practices in Cash Management
• Different Funding Alternatives – Issuing Debt
• Hedging Activities for FX risk
• Audit Concerns in Hedging FX with Derivatives

Understanding the Derivative Environment

• The Importance of Auditing Derivatives
• What’s Going Wrong? What’s Going Right?
• Derivative Debacles of the Past
• Hedging vs. Speculation
• Introduction to Derivative Risk Management

The Forward and Futures Contracts

• Defining the Forward Contract
• Why Forwards rather than Futures
• Mechanics of a Forward Contract
• Accounting for a Forward Contract
• Defining the Futures Contract
• Characteristics of Exchange-Traded Contracts
• The Mechanics of Margin
• Using Futures to Hedge Price Uncertainty

The Option Market

• Fundamentals of Options
• Option Terminology
• Analyzing the Option Premium
• Types of Options
• Exchange-Traded
• Caps and Floors
• Collars

The Swap Market

• SWAP Mechanics
• SWAP and SWAPTION Terminology
• Understanding SWAPS examples
• Credit Derivatives – Default SWAPS

Understanding and Auditing the Investment and Derivative Infrastructure

• The Roles of the Back Office
• Back Office Systems and Controls
• Understanding the Pitfalls of Investment Reporting
• The Roles of the Front Office
  • Discussing the Portfolio Management Process
  • Front Office Red Flags
• The Roles of the Middle Office
  • Discussing the Risk Management Role
  • Discussing the Compliance Role
  • Is it really Independent?

The Asset and Liability Management Function

• Significance of the Asset and Liability Function
• The Key Risks in the ALM function
  • Audit Objectives in Reviewing the ALM Function
  • Reviewing Best Practices in the ALM process

Controlling Derivative Activities

• Management Risk
  • Segregation of Duties
  • Management’s Responsibilities
  • Internal Controls and Audit Considerations
• Market Risk
  • VAR
  • The Three Methods of Computing VAR
  • Using VAR to establish Trading Limits
  • Model Verification
  • Pro and Cons
  • Internal Controls and Audit Considerations
• Counterparty & Legal Risk
  • Master Agreements
  • Credit Enhancements – Credit Metrics
  • Internal Controls and Audit Considerations
  • Legal Risk
  • Netting Enforceability
  • Foreign Counterparties
  • Internal Controls and Audit Considerations
• Operational Risk
  • Most Common Operational Problems in Derivative Settlements with Counterparties
  • Confirmation issues to be Concerned about
  • Internal Controls and Audit Considerations