An Introduction to Value-at-Risk by Moorad Choudhry

By Moorad Choudhry

The value-at-risk size method is a widely-used device in monetary marketplace probability administration. The 5th variation of Professor Moorad Choudhry’s benchmark reference textual content An advent to Value-at-Risk bargains an obtainable and reader-friendly examine the idea that of VaR and its assorted estimation equipment, and is aimed particularly at beginners to the marketplace or these surprising with sleek threat administration practices. the writer capitalises on his adventure within the monetary markets to offer this concise but in-depth assurance of VaR, set within the context of threat administration as a whole.

Topics lined include:

  • Defining value-at-risk
  • Variance-covariance methodology
  • Portfolio VaR
  • Credit chance and credits VaR
  • Stressed VaR
  • Critique and VaR in the course of crisis

Topics are illustrated with Bloomberg monitors, labored examples and workouts. comparable concerns comparable to information, volatility and correlation also are brought as useful heritage for college students and practitioners. this can be crucial studying for all those that require an creation to monetary marketplace hazard administration and danger dimension techniques.

Foreword by way of Carol Alexander, Professor of Finance, college of Sussex.

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Example text

Senior management and shareholders are often interested in the potential loss arising from catastrophe situations, such as a stock market crash, so for them a 99% confidence level is more appropriate. 3. Create a probability distribution of likely returns for the instrument or portfolio under consideration – several methods may be used. The easiest to understand is the distribution of recent historical returns for the asset or portfolio which often looks like the curve associated with the normal distribution.

The classification has assumed a 1-year horizon, but the concepts apply to any time horizon. Forms of market risk Market risk reflects the uncertainty as to an asset’s price when it is sold. Market risk is the risk arising from movements in financial market prices. Specific market risks will differ according to the type of asset under consideration: INTRODUCTION TO RISK . . 5 Currency risk – this arises from exposure to movements in FX rates. A version of currency risk is transaction risk, where currency fluctuations affect the proceeds from day-to-day transactions.

71. Of course, a bank’s trading book will contain many hundreds of different assets, and the method employed above, useful for a twoasset portfolio, will become unwieldy. Therefore, matrices are used to calculate the VaR of a portfolio where many correlation coefficients are used. This is considered below. 1(i). The standard deviation of each asset has been calculated on historical observation of asset returns. Note that returns are returns of asset prices, rather than the prices themselves; they are calculated from the actual prices by taking the ratio of closing prices.

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