An Introduction to Value-at-Risk

✍ Scribed by Moorad Choudhry, Ketul Tanna

• Publisher: Wiley
• Year: 2006
• Tongue: English
• Leaves: 194
• Series: Securities Institute
• Edition: 4
• Category: Library

✦ Synopsis

The value-at-risk measurement methodology is a widely-used tool in financial market risk management. The fourth edition of Professor Moorad Choudhry's benchmark reference text An Introduction to Value-at-Risk offers an accessible and reader-friendly look at the concept of VaR and its different estimation methods, and is aimed specifically at newcomers to the market or those unfamiliar with modern risk management practices. The author capitalises on his experience in the financial markets to present this concise yet in-depth coverage of VaR, set in the context of risk management as a whole.

Topics covered include:

• Defining value-at-risk
• Variance-covariance methodology
• Monte Carlo simulation
• Portfolio VaR
• Credit risk and credit VaR

Topics are illustrated with Bloomberg screens, worked examples, exercises and case studies. Related issues such as statistics, volatility and correlation are also introduced as necessary background for students and practitioners. This is essential reading for all those who require an introduction to financial market risk management and value-at-risk.

✦ Table of Contents

COVER......Page 1
CONTENTS......Page 9
Foreword......Page 15
Preface......Page 17
Preface to the first edition......Page 19
About the author......Page 21
1: INTRODUCTION TO RISK......Page 23
Defining risk......Page 24
Forms of market risk......Page 25
Other risks......Page 27
Risk estimation......Page 28
The risk management function......Page 29
Standard deviation......Page 31
Van RatioRatio......Page 32
2: VOLATILITY AND CORRELATION......Page 35
Arithmetic mean......Page 36
Probability distributions......Page 38
Confidence intervals......Page 40
Volatility......Page 41
The normal distribution and VaR......Page 46
Correlation......Page 48
3: VALUE-AT-RISK......Page 51
Definition......Page 52
Centralised database......Page 54
Correlation method......Page 55
Historical simulation method......Page 56
How to calculate value-at-risk......Page 57
Historical method......Page 58
Variance–covariance, analytic or parametric method......Page 59
Mapping......Page 66
Confidence intervals......Page 68
Comparison between methods......Page 69
Choosing between methods......Page 70
Comparison with the historical approach......Page 74
Other market methodologies......Page 75
Use of VaR models......Page 76
Bank of England comparison of VaR models......Page 77
Summary......Page 79
4: VALUE-AT-RISK FOR FIXED INTEREST INSTRUMENTS......Page 83
Bond valuation......Page 84
Duration......Page 86
Convexity......Page 88
Forward rate agreements......Page 89
Fixed income portfolio......Page 92
Applying VaR for a FRA......Page 94
VaR for an interest rate swap......Page 96
Calculation illustration......Page 100
The historical method......Page 103
Simulation methodology......Page 104
Application......Page 105
Bloomberg screens......Page 106
5: OPTIONS: RISK AND VALUE-AT-RISK......Page 109
Option pricing......Page 110
Volatility......Page 112
The Greeks......Page 113
Gamma......Page 114
Vega......Page 115
Spot ladder......Page 116
Applying VaR for Options......Page 117
6: MONTE CARLO SIMULATION AND VALUE-AT-RISK......Page 123
Option value under Monte Carlo......Page 124
Monte Carlo distribution......Page 126
Monte Carlo simulation and VaR......Page 127
7: REGULATORY ISSUES AND STRESS-TESTING......Page 131
Model compliance......Page 132
CAD II......Page 133
Specific risk......Page 135
Stress-testing......Page 136
Simulating stress......Page 137
Stress-testing in practice......Page 138
Issues in stress-testing......Page 139
8: CREDIT RISK AND CREDIT VALUE-AT-RISK......Page 141
Credit default risk......Page 142
Credit ratings......Page 143
Ratings changes over time......Page 145
Corporate recovery rates......Page 147
Credit derivatives......Page 148
Measuring risk for a CDS contract......Page 150
Modelling credit risk......Page 151
CreditMetrics......Page 153
Methodology......Page 154
Time horizon......Page 155
Calculating the credit VaR......Page 156
CreditRisk......Page 159
Prioritising risk-reducing actions......Page 164
Integrating the credit risk and market risk functions......Page 166
Case Study and Exercises......Page 169
Appendix: Taylor’s Expansion......Page 177
Abbreviations......Page 181
Selected bibliography......Page 183
Index......Page 185