Risk Management: New Approaches. Prof Ian Giddy New York University. Corporate Value at Risk. Position limits vs. “money at risk” Sensitivity of positions to factors How volatile are the factors? What is the 90% range (1.65 std dev.)?
Prof Ian Giddy
New York University
Potential loss (X% probability)
= Amount at risk * price volatility
=Amount at risk * Sensitivity * Adverse price move per period
May further take into account time-to-close: in JP Morgan jargon, Dear vs VaR
Var = DeaR * p(unwind period)
The variance of a 2-asset portfolio, :
where wAand wBare the weights of A and B in the portfolio.
To evaluate the gains and structure of a portfolio, we need a variance-covariance matrix:
$ AT RISK VOL. AUD BEF
AUD $85,085 2.909 1
BEF $2,607,892 4.573 -0.273 1
where wi are the weights of each asset in the portfolio. (Expected return is simply the weighted sum of the individual asset returns.)
When i = j, the term wiwjFiFjDijbecomes wi2Fi2.
Volatility in the market
Deviation from expectations
FARMCO CORPORATION, CASH FLOW PROJECTIONS
On the World Wide Web, RiskMetrics data may be found at:
LESS THAN 5%
“At close of business each day tell me what the market risks are across all businesses and locations.”
Dennis Weatherstone, JP Morgan
Value at Risk and RiskMetrics: