R40: Measuring and Managing Market Risk Flashcards
1
Q
Value at Risk (VaR)
A
- the minimum loss that would be expected a certain percentage of the time over a certain time period, given assumed market conditions
- meant to capture market risk for equity prices, interest rates, exchange rates, and commodity prices.
2
Q
VaR at 1%
A
2.33 sd
3
Q
VaR at 1sd
A
16% VaR
4
Q
VaR at 5%
A
1.65 sd
6
Q
parametric method
A
- generally assumes distribution of returns on risk factors is normal
- simple & straightforward
- VaR sensitive to E(R) and sd
- difficult to use if the portfolio contains options as that threatens normality
7
Q
historical simulation method process
A
- for certain time period (ie 2 years), weight the portfolio every day, calculate a daily return for each day
- 500 hundred observations, calculate the day to day losses and rank them
- then take percentiles (5% VaR), that’s the VaR
8
Q
historical simulation method notes
A
- what if you a bond today that didn’t exist 2 years ago,
- a lot of modifications, use of proxies
- not constrained by assumption of normality
- estimation of VaR using what actually happened (while keeping in mind that the past may not repeat itself)
9
Q
monte carlo simulation
A
- same method of ranking losses
- not constrained by any distribution
- avoids complexity of the parametric method when the portfolio has many risk factors
10
Q
Conditional VaR
A
- relies on a particular VaR
- it is the average loss if the VaR loss is exceeded
- best derived using historical simulation and monte carlo
11
Q
Incremental VaR
A
- how a VaR will change if a position size is changed relative to the remaining position
- before vs after calculation
12
Q
Marginal VaR
A
- conceptually the same as incremental VaR, but for very small change in position
- change in VaR given a $1 or 1% change
13
Q
Relative VaR
A
- ex-ante tracking error
- the degree to which the performance of a given portfolio might deviate from its benchmark
- (portfolio holdings - benchmark holdings): active positions
14
Q
Sensitivity Risk Measures
A
- examines how performance responds to a single change in an underlying risk factor
- equities: factor sensitivities
- fixed income: duration and convexity
- options: delta, gamma, and vega
15
Q
Scenario risk measures
A
- estimates the portfolio return that would result from a hypothetical change in markets or a repeat of a historical event.
- multiple factor movements (i.e vega, delta is at a point in time)
