week6 - Bank BankManagement Week6:MarketRisk(II) 2/14/2012

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ank Management Bank Management Week 6: Market Risk (II) 2/14/2012 1 NUS Business School, Nan Li

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iskMetrics Model RiskMetrics Model Daily Earnings At Risk (DEAR ) = \$ value of position×price sensitivity × otential adverse move in yield potential adverse move in yield or DEAR = \$ market value of position × Price volatility. 2/14/2012 3 NUS Business School, Nan Li

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Risk Metric: Fixed Income Securities Adverse daily yield move Direction of the move Magnitude of the move Depends on the volatility of the change in YTM we can use historical data to estimate the distribution of the change in yields ( R) Movement in yields is stationary The distribution of R t and R s is the same for all t and s ovement in yields is godic Movement in yields is ergodic { R t } (t = 1, 2, 3…. .) is represents almost all the possible values of R t 2/14/2012 4 NUS Business School, Nan Li
Fixed Income Securities : Normal Distribution we assume the distribution f If we assume the distribution of R t is normal, and confidence level is 5%, then DEAR = P × (MD) × (Potential adverse change in yield) D) 65 = P × (MD) × 1.65 × σ ( Δ R) If confidence level is 1%, then DEAR = P × (MD) × 2.33 × σ ( Δ R) 2/14/2012 5 NUS Business School, Nan Li

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andard Normal Critical Values Standard Normal Critical Values one α tailed two tailed 0% .85 .29 .29 α 1 ‐α 20% 0.85 1.29 1.29 15% 1.04 1.44 1.44 10% 1.29 1.65 1.65 5% 1.65 1.96 1.96 2.5% 1.96 2.25 2.25 % .33 .58 .58 1% 2.33 2.58 2.58 2/14/2012 NUS Business School, Nan Li 6
xed come Securities: aR Fixed Income Securities: VaR calculate the potential loss for days : To calculate the potential loss for N days : Market value at risk (VaR N ) = DEAR×(N) 1/2 Example: For a five day period, VaR 5 = \$10,770×(5) 1/2 = \$24,082 2/14/2012 7 NUS Business School, Nan Li

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xed come Securities: aR Fixed Income Securities: VaR aR 2 (VaR 5 ) = (DEAR) 2 +(DEAR) 2 +(DEAR) 2 +(DEAR) 2 + (DEAR) 2 Assumption: Δ R 1 Δ R 2 Δ R 3 Δ R 4 Δ R 5 are independent and identically distributed (i.i.d.) 2/14/2012 NUS Business School, Nan Li 8
arket Risk of Foreign Exchange

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This note was uploaded on 02/29/2012 for the course FINANCE FIN 3117 taught by Professor Lina during the Spring '12 term at National University of Singapore.

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week6 - Bank BankManagement Week6:MarketRisk(II) 2/14/2012

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