Meistaravörn við tækni- og verkfræðideild - Þórdís Sara Ársælsdóttir

Managing Settlement Risk in Banking

  • 21.5.2018, 10:30 - 12:00

Title: Managing Settlement Risk in Banking
Student: Þórdís Sara Ársælsdóttir             
Supervisor: Sverrir Ólafsson, Reykjavík University
External examiner: Yngvi Harðarson, Analytica

Summary:
Settlement risk has recently become a hot topic in the risk management of financial institutions. Scandinavian banks have started to consider it in their Pillar 3 Reports and capital requirements. Settlement risk is the risk that a counterparty fails to fulfill its end of a contract of delivering securities or their value in cash, when the security/cash has already been delivered. A lot of the research and publications on settlement risk focus on the systematic approach of mitigating settlement risk. In this thesis the focus is on identifying and quantifying settlement risk by using financial mathematical methods.The project is to define which financial instruments at a certain bank contain settlement risk and retrieve data on those financial instruments. The thesis works with available data to detect which instruments contain the most risk. The focus is on settlement time as well as a search for patterns on exposure versus the risk taken. The fundamental mathematical techniques applied are based on the assumption that prices follow a geometric Brownian motion process. We then apply Ito’s Lemma, arbitrage techniques and basic probabilistic methods to quantify the settlement risk exposure.