An Introduction to Value-at-Risk by Moorad Choudhry

By Moorad Choudhry

The value-at-risk dimension method is a widely-used device in monetary industry hazard administration. The fourth variation 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 assorted estimation equipment, and is aimed particularly at newbies to the industry or these unexpected with glossy hazard administration practices. the writer capitalises on his adventure within the monetary markets to give this concise but in-depth insurance of VaR, set within the context of possibility administration as an entire.

Topics coated contain:

  • Defining value-at-risk
  • Variance-covariance method
  • Monte Carlo simulation
  • Portfolio VaR
  • Credit threat and credits VaR

subject matters are illustrated with Bloomberg monitors, labored examples, workouts and case experiences. similar matters akin to information, volatility and correlation also are brought as precious historical past for college students and practitioners. this is often crucial examining for all those that require an advent to monetary industry probability administration and value-at-risk.

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Extra resources for An Introduction to Value-at-Risk

Sample text

Volatility is important for both VaR measurement and in the valuation of options. It is a method of measuring current asset price against the distribution of the asset’s future price. Statistically, volatility is defined as the fluctuation in the underlying asset price over a certain period of time. Fluctuation is derived from the change in price between one day’s closing price and the next day’s closing price. Where the asset price is stable it will exhibit low volatility, and the opposite when price movements are large and/or unstable.

VaR is but one ingredient of risk management, a measurement tool for market risk. METHODOLOGY Centralised database To implement VaR, all of a firm’s positions data must be gathered into one centralised database. Once this is complete the overall risk has to be calculated by aggregating the risks from individual instruments across the entire portfolio. , each risk factor) has to be inferred from past daily price movements over a given observation period. For regulatory purposes this period is at least 1 year.

From the point of view of business managers though, the perspective may be slightly different and possibly shorter term. For them, risk management often takes the following route: . . create as diversified a set of business lines as possible, and within each business line diversify portfolios to maximum extent; establish procedures to enable some measure of forecasting of market prices; hedge the portfolio to minimise losses when market forecasts suggest that losses are to be expected. The VaR measurement tool falls into the second and third areas of this strategy.

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