International Finance and Accounting Handbook

represent agreements to deliver a specified quantity of these assets at a prespecified price on a future date, and option contra ...

8 • 1 CHAPTER 8 MARKET RISK Anthony Saunders New York University Marcia M. Cornett Southern Illinois University CONTENTS 8.1 ...

atively turbulent year that featured considerable currency and financial market volatility in Eastern Europe and Asia. This vola ...

Market risk arises whenever FIs actively trade assets and liabilities (and derivatives) rather than holding them for longer term ...

8.3 CALCULATING MARKET RISK EXPOSURE. Large commercial banks, invest- ment banks, insurance companies, and mutual funds have all ...

8.2, when JPM developed its RiskMetrics Model it had 14 active trading locations with 120 independent units trading fixed income ...

$1,631,483.^7 Today’s yield on these bonds is 7.243% per annum. These bonds are held as part of the trading portfolio. Thus, The ...

while the standard deviation was 10 basis points (or 0.001). Thus, 1.65is 16.5 basis points (bp).^11 In other words, over the l ...

We can extend this analysis to calculate the potential loss over 2, 3... Ndays. If we assume that yield shocks are independent a ...

(b) Foreign Exchange. Like other large FIs, J.P. Morgan Chase actively trades in foreign exchange (FX). Remember that: Suppose t ...

(c) Equities. Many large FIs also take positions in equities. As is well known from the Capital Asset Pricing Model (CAPM), ther ...

million market value), and a position in the U.S. stock market index ($1 million mar- ket value). The individual DEARs were: Se ...

dividualDEARs (in thousands of dollars), we get The equation indicates that considering the risk of each trading position as wel ...

8 • 13 Interest Rate Risk Notional Amounts (U.S. $millions equivalents) FX Risk Total 1 1 2 3 4 5 7 10 Interest Spot FX Portfoli ...

8.5 HISTORIC OR BACK SIMULATION APPROACH. A major criticism of RiskMet- rics is the need to assume a symmetric (normal) distribu ...

The essential idea is to take the current market portfolio of assets (FX, bonds, eq- uities, etc.) and revalue them on the basis ...

8 • 16 MARKET RISK Yen Swiss Franc Step 1. Measure Exposures Closing position on December 1, 2003 500,000,000 20,000,000 Exchan ...

Step 5: Rank days by risk from worst to best.These risk measures can then be ranked from worst to best. Clearly the worst-case ...

regimes: from relatively fixed exchange rates in the 1950–1970 period, to relatively floating exchange rates in the 1970s, to mo ...

survive market risk losses. Since January 1998^33 banks in the countries that are members of the BIS can calculate their market ...