This document discusses complex derivatives instruments and risk management tools. It defines derivatives with non-linear or path dependent payoffs, and lists exotic options, credit default swaps, and collateralized debt obligations as examples. It also discusses the COSO framework for risk management and enterprise risk management. Tools for risk management mentioned include value-at-risk calculations, historical scenario analysis, Monte Carlo simulations, and stress testing. The document notes that auditors, regulators, and others should care about these topics. It concludes by thanking the reader.

1. Financial Instruments & Technology Complex Derivatives Instruments & Risk Management UNIVERSITY OF WATERLOO Acc 626 IT Assurance and CAATs Kelly Wong July 2011

2. Complex Derivatives Instruments “Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” – Warren Buffet (2002) Definition: derivatives with payoff often that are non-linear or path dependent ; mainly OTC Examples: Exotic Options, Credit Default Swaps (CDSs),Collateralized Debt Obligations (CDOs)

3. Risk Management COSO Framework Help C-Suite executive to design control procedures and the formulation of risk management policies, such that unforeseen and undesirable outcomes are minimized. Enterprise Risk Management (ERM) Value-at-Risk Stress Test

4. Tools for Risk Management Value-at-Risk (VaR) Calculates the maximum loss that a firm can suffer over a defined period of time at a given probability level. Historical Scenarios - Excel can handle Monte Carlo Simulations - Heavy computing power Examples of ASP: GoldSim Technology Group FactSet Research Systems

5. Tools for Risk Management Stress Testing “the potential effects on a firm’s financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events “ – Bank of International Settlements Example of ASP: ForexManage’siDeriv Key Players: Thomson Reuters, Bloomberg, Murex, Algorithmics

6. Why should CA care? Many at C-Suite level Internal or external auditor Market makers Regulators Academia …It’s interesting! 

7. Tools For Auditors Risk Assessment - CAATs Example: Pattern Analysis – Fraud Detection System Testing – Due to lack of audit trail Valuation Tools Data providers: Bloomberg, Thomson Reuters ASP: FINCAD ‘s “Auditor Insight”

8. Hot Topic: Regulatory Outsourcing Definition: The criticism of regulators delegating and outsourcing the responsibility of regulating a wide range of risk transfers in the economy to computer-based risk models. New Rules: Dodd-Frank Act to Basel III and Solvency II

10. Thank you!

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