Masterclass 2 Flashcards
What is General Market Risk?
Changes in the value of positions due to broader market movements.
What is Specific Market Risk?
Changes in the value of a position due to factors other than broader market movements.
What is migration risk?
Due to large changes in market prices due to a credit migration event, a change in the rating of the issuer.
What is basis risk?
Risk that arises from a mismatch in hedged position.
E.g. hedging equities with bonds, there is a possibility they could both go down.
What does VaR stand for?
Value-at-Risk
What is VaR used for?
Measuring potential economic loss.
What is VaR
A statistical measure of the probability that a loss will exceed a defined threshold over a time period, factoring in market variables.
What is the simulation approach?
Using simulations to calculate P&L probability distributions.
What is the confidence level?
The probability that losses are within VaR.
What is the holding period?
Time between value changes. 1-day, 10-day
What is the historical window length?
Period of time used to construct VaR estimates. Essentially your data set. 1, 3, 10 years.
What is the weighting method?
Time weighting over the historical
window
