Class%20#12%20461%20Mkt%20Risk0 - Measuring Market Risk...

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Measuring Market Risk Using VAR
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2 CE Presentations TODAY: Drew Osika and Angela Jiang TUESDAY: Discuss Assignment #1 Assignment: Text, Chapters 11 and 13 (pp. 380-386) Exam #1 next Thursday in class
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3 Class Outline 1. Market risk—what is it? 2. RiskMetrics and VAR 3. Portfolio aggregation 4. VAR and capital
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4 1. Market risk —what is it? Some (big) banks perform a trading function : Acting as a dealer in certain assets for customers Trading , or taking positions, for their own account (called proprietary trading) to make a profit As a result they have an inventory of financial assets ( trading account assets ). These assets can change in value (prices change) leading to losses for the bank. These assets can include: Bonds, commodities, foreign currencies, derivatives, and equities (also MBSs, CDOs, etc.). This is called the trading book (as opposed to the banking book that has deposits and loans)
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5 The issue for risk management of the trading book is the bank’s exposure to potential loss. How much might the bank lose , in a short period of time , because of a decrease in the value of the assets in the trading book, if a really bad day occurs? Banks with big trading books are exposed to more risk than banks without trading books and their stocks trade at lower P/E ratios to reflect the higher risk Price movements in trading account assets are caused by many variables, including changes in : Interest rates and rate differentials among countries Inflation and inflation expectations among countries Economic growth differentials among countries Bond ratings Earnings announcements & other nonsystematic events
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6 2. RiskMetrics and VAR The focus in measuring market risk exposure is on a short period of time ahead (rather than the one-year horizon used for interest rate risk), perhaps just
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This note was uploaded on 10/28/2011 for the course FIN 461 taught by Professor Morgan during the Fall '11 term at University of Illinois at Urbana–Champaign.

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Class%20#12%20461%20Mkt%20Risk0 - Measuring Market Risk...

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