Download An Introduction to Value-at-Risk by Moorad Choudhry PDF

By Moorad Choudhry

The value-at-risk size method is a widely-used software in monetary industry threat administration. The 5th version 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 tools, and is aimed in particular at beginners to the industry or these unexpected with glossy chance administration practices. the writer capitalises on his event within the monetary markets to provide this concise but in-depth assurance of VaR, set within the context of threat administration as a whole.

Topics coated include:

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

Topics are illustrated with Bloomberg displays, labored examples and routines. comparable concerns corresponding to records, volatility and correlation also are brought as useful history for college students and practitioners. this is often crucial analyzing for all those that require an creation to monetary industry probability administration and danger size techniques.

Foreword via Carol Alexander, Professor of Finance, college of Sussex.

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Extra resources for An Introduction to Value-at-Risk

Example text

We now look at these steps in greater detail. 38 AN INTRODUCTION TO VALUE-AT-RISK Decompose financial instruments The analytic method assumes that financial instruments can be decomposed or ‘mapped’ into a set of simpler instruments that are exposed to only one market factor. For example, a 2-year UK gilt can be mapped into a set of zero-coupon bonds representing each cash flow. Each of these zero-coupon bonds is exposed to only one market factor – a specific UK zero-coupon interest rate. Similarly, a foreign currency bond can be mapped into a set of zero-coupon bonds and a cash foreign exchange amount subject to movement in the spot foreign exchange (FX) rate.

Credit risk – the risk that an obligor (the entity that has borrowed funds from you) defaults on the loan repayments. Counterparty risk – all transactions involve one or both parties in counterparty risk, the potential loss that can arise if one party 6 . . AN INTRODUCTION TO VALUE-AT-RISK were to default on its obligations. Counterparty risk is most relevant in the derivatives market, where every contract is marked-to-market daily and so a positive MTM is taken to the profit & loss (P&L) account.

Risk management departments exist not to eliminate the possibility of all risk, should such action indeed be feasible or desirable; rather, to control the frequency, extent and size of such losses in such a way as to provide the minimum surprise to senior management and shareholders. Risk exists in all competitive business although the balance between financial risks of the type described above and general and management risk varies with the type of business engaged in. The key objective of the risk management function within a financial institution is to allow for a clear understanding of the risks and exposures the firm is engaged in, such that monetary loss is deemed acceptable by the firm.

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