This lesson covers the quantitative techniques used to measure financial risk, with a focus on Value at Risk (VaR).

7.1. The VaR Concept

Value at Risk is a standard measure for quantifying market risk . It estimates the maximum potential loss of a portfolio over a specific time horizon at a given confidence level. VaR is used to set risk limits and allocate capital.

7.2. VaR Methodologies

There are three primary methods for calculating VaR:

• Variance-Covariance: Assumes asset returns follow a normal distribution. A key limitation is that it does not support optionality.

• Historical Simulation: Uses actual historical returns to simulate possible future outcomes.

• Monte Carlo Simulation: Generates thousands of random possible future scenarios for market prices.

7.3. Other Risk Metrics

Other key risk metrics include standard deviation and correlation, which are used to build diversified portfolios and manage risk.

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Lesson 8: Governance, Controls, and Ethics in Risk Management

This final lesson examines the governance framework and ethical considerations that support effective risk management .

8.1. Governance Frameworks

The treasury function must operate within a robust governance framework. The ACT and CTP curricula both emphasise the importance of governance, risk controls, and professional ethics . This framework defines the responsibilities of key bodies, such as the board, audit committee, and risk committee.

8.2. Internal Controls and Policies

A strong system of internal controls is essential for mitigating operational risk and ensuring compliance with treasury policies . This includes segregation of duties, authorisation levels, and regular audits .

8.3. Ethics and Professional Conduct

The treasury function is a trusted profession, and ethical conduct is non-negotiable . Treasury professionals are expected to “comply with treasury policies and procedures” and “detect and mitigate fraud” . Professional qualifications like the ACT’s AMCT and the AFP’s CTP are built around a foundation of ethical practice and professional standards