Overview. This chapter discusses the nature of market risk and appropriate measures RiskMetrics Historic or back simulation Monte Carlo simulation Links between market risk and capital requirements. Trading Risks. Trading exposes banks to risks
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DEAR = dollar market value of position × price volatility.
price volatility = price sensitivity of position × potential adverse move in yield
DEAR = (MD) × (potential adverse daily yield move)
MD = D/(1+R).
MD = Modified duration
D = Macaulay duration
= (6.527) (0.00165) = 1.077%
DEAR = Market value of position (Price volatility)
= ($1,000,000) (.01077) = $10,770
Market value at risk
(VARN) = DEAR ×
For a five-day period,
VAR5 = $10,770 ×
DEAR = dollar value of position × stock market return volatility, where
market volatility taken as 1.65 sm
DEAR portfolio = [DEARa2 + DEARb2 +
DEARc2 + 2rab × DEARa × DEARb + 2rac ×
DEARa × DEARc + 2rbc × DEARb × DEARc]1/2
Bank for International Settlement www.bis.org
Federal Reserve Bank www.federalreserve.gov
Banker of America
J.P. Morgan Chase