An Introduction to Value-at-Risk by Moorad Choudhry

By Moorad Choudhry

The value-at-risk size technique is a widely-used software in monetary marketplace possibility administration. The 5th version of Professor Moorad Choudhry’s benchmark reference textual content An creation to Value-at-Risk deals an obtainable and reader-friendly examine the concept that of VaR and its diverse estimation equipment, and is aimed in particular at rookies to the industry or these unexpected with sleek chance administration practices. the writer capitalises on his adventure within the monetary markets to give this concise but in-depth assurance of VaR, set within the context of probability 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 corresponding to records, volatility and correlation also are brought as worthy history for college kids and practitioners. this can be crucial analyzing for all those that require an advent to monetary industry chance administration and chance dimension techniques.

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

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Extra resources for An Introduction to Value-at-Risk

Example text

Since the reinvestment rate is unknown when the asset is purchased, the final cash flow is uncertain. Sovereign risk – this is a type of credit risk specific to a government bond. Post 2008, there is material risk of default by an industrialised country. A developing country may default on its obligation (or declare a debt ‘moratorium’) if debt payments relative to domestic product reach unsustainable levels. Prepayment risk – this is specific to mortgage-backed and asset-backed bonds. For example, mortgage lenders allow the homeowner to repay outstanding debt before the stated maturity.

The various alternative methods are examined in Chapter 3. RISK MANAGEMENT The risk management function grew steadily in size and importance within commercial and investment banks during the 1990s. 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.

If the bank’s risk management function is effective, there will be no over-reaction to 8 AN INTRODUCTION TO VALUE-AT-RISK any unexpected losses, which may increase eventual costs to many times the original loss amount. The risk management function While there is no one agreed organisation structure for the risk management function, the following may be taken as being reflective of the typical bank set-up: . . . an independent, ‘middle office’ department responsible for drawing up and explicitly stating the bank’s approach to risk, and defining trading limits and the areas of the market that the firm can have exposure to; the head of the risk function reporting to an independent senior manager, who is a member of the executive board; monitoring the separation of duties between front, middle and back office, often in conjunction with an internal audit function; reporting to senior management, including firm’s overall exposure and adherence of the front office to the firm’s overall risk strategy; communication of risks and risk strategy to shareholders; where leading edge systems are in use, employment of the risk management function to generate competitive advantage in the market as well as control.

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