Chapter. 10. Market Risk . Overview. This chapter discusses the nature of market risk and appropriate measures Dollar exposure RiskMetrics Historic or back simulation Monte Carlo simulation Links between market risk and capital requirements. Market Risk:.
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DEAR = Dollar market value of position × Price volatility.
MD = D/(1+R)
Modified duration = MacAulay duration/(1+R)
= (-6.527) (0.00165) = -1.077%
DEAR = Market value of position (Price volatility)
= ($1,000,000) (.01077) = $10,770
Market value at risk (VAR) = DEAR × N
For a five-day period,
VAR = $10,770 × 5 = $24,082
DEAR = dollar value of position × stock market return volatility where the market return volatility is taken as 1.65 sM.
DEAR portfolio = [DEARa2 + DEARb2 + DEARc2 + 2rab × DEARa × DEARb + 2rac × DEARa × DEARc + 2rbc × DEARb × DEARc]1/2
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