|
Market Risk
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most commonly used types of market risk are: * '' Equity risk'', the risk that stock or stock indices (e.g. Euro Stoxx 50, etc.) prices or their implied volatility will change. * ''Interest rate risk'', the risk that interest rates (e.g. Libor, Euribor, etc.) or their implied volatility will change. * '' Currency risk'', the risk that foreign exchange rates (e.g. EUR/USD, EUR/GBP, etc.) or their implied volatility will change. * '' Commodity risk'', the risk that commodity prices (e.g. corn, crude oil) or their implied volatility will change. * '' Margining risk'' results from uncertain future cash outflows due to margin calls covering adverse value changes of a given position. * '' Shape risk'' * '' Holding period risk'' * '' Basi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. One ISO standard, international standard definition of risk is the "effect of uncertainty on objectives". The understanding of risk, the methods of assessment and management, the descriptions of risk and even the definitions of risk differ in different practice areas (business, economics, Environmental science, environment, finance, information technology, health, insurance, safety, security, security, privacy, etc). This article provides links to more detailed articles on these areas. The international standard for risk management, ISO 31000, provides principles and general guidelines on managing risks faced by organizations. Defi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Margining Risk
''Margining risk'' is a financial risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financi ... that future cash flows are smaller than expected due to the payment of Margin (finance), margins, i.e. a collateral (finance), collateral as deposit from a counterparty to cover some (or all) of its credit risk. It can be seen as a short-term liquidity risk, a quantity called Margin at risk, MaR can be used to measure it. Methodology In order to decrease the risk of a counter party to Default_(finance), default, a technique called ''portfolio margining'' is applied, which simply means that the assets within a Portfolio_(finance), portfolio are clustered and sorted by the descending projected net loss, e.g. calculated by a pricing model. One can then determine for which cluster(s) one wants to ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basel Committee
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (economic), Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 and then again in 2014. As of 2019, the BCBS has 45 members from 28 jurisdictions, consisting of central banks and authorities with responsibility of banking regulation. The committee agrees on standards for bank capital, liquidity and funding. Those standards are non-binding high-level principles. Members are expected but not obliged to undertake effort to implement them e.g. through domestic regulation. Overview The committee provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The committee frames guidelines and standards in different areas – some of the better known ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Historical Simulation (finance)
Historical simulation in finance's value at risk (VaR) analysis is a procedure for predicting the value at risk by 'simulating' or constructing the cumulative distribution function (CDF) of assets returns over time assuming that future returns will be directly sampled from past returns. Unlike parametric VaR models, historical simulation does not assume a particular distribution of the asset returns. Also, it is relatively easy to implement. However, there are a couple of shortcomings of historical simulation. Traditional historical simulation applies equal weight to all returns of the whole period; this is inconsistent with the diminishing predictability of data that are further away from the present. Weighted historical simulation Weighted historical simulation applies decreasing weights to returns that are further away from the present, which overcomes the inconsistency of historical simulation with diminishing predictability of data that are further away from the present. H ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Variance Covariance
In probability theory and statistics, a covariance matrix (also known as auto-covariance matrix, dispersion matrix, variance matrix, or variance–covariance matrix) is a square matrix giving the covariance between each pair of elements of a given random vector. Intuitively, the covariance matrix generalizes the notion of variance to multiple dimensions. As an example, the variation in a collection of random points in two-dimensional space cannot be characterized fully by a single number, nor would the variances in the x and y directions contain all of the necessary information; a 2 \times 2 matrix would be necessary to fully characterize the two-dimensional variation. Any covariance matrix is symmetric and positive semi-definite and its main diagonal contains variances (i.e., the covariance of each element with itself). The covariance matrix of a random vector \mathbf is typically denoted by \operatorname_, \Sigma or S. Definition Throughout this article, boldfaced unsubs ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Coherent Risk Measure
In the fields of actuarial science and financial economics there are a number of ways that risk can be defined; to clarify the concept theoreticians have described a number of properties that a risk measure might or might not have. A coherent risk measure is a function that satisfies properties of monotonicity, sub-additivity, homogeneity, and translational invariance. Properties Consider a random outcome X viewed as an element of a linear space \mathcal of measurable functions, defined on an appropriate probability space. A functional \varrho : \mathcal → \R \cup \ is said to be coherent risk measure for \mathcal if it satisfies the following properties: Normalized : \varrho(0) = 0 That is, the risk when holding no assets is zero. Monotonicity : \mathrm\; Z_1,Z_2 \in \mathcal \;\mathrm\; Z_1 \leq Z_2 \; \mathrm ,\; \mathrm \; \varrho(Z_1) \geq \varrho(Z_2) That is, if portfolio Z_2 always has better values than portfolio Z_1 under almost all scenarios then the risk of ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Subadditivity
In mathematics, subadditivity is a property of a function that states, roughly, that evaluating the function for the sum of two elements of the domain always returns something less than or equal to the sum of the function's values at each element. There are numerous examples of subadditive functions in various areas of mathematics, particularly norms and square roots. Additive maps are special cases of subadditive functions. Definitions A subadditive function is a function f \colon A \to B, having a domain ''A'' and an ordered codomain ''B'' that are both closed under addition, with the following property: \forall x, y \in A, f(x+y)\leq f(x)+f(y). An example is the square root function, having the non-negative real numbers as domain and codomain: since \forall x, y \geq 0 we have: \sqrt\leq \sqrt+\sqrt. A sequence \left \_ is called subadditive if it satisfies the inequality a_\leq a_n+a_m for all ''m'' and ''n''. This is a special case of subadditive function, if a sequ ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Value At Risk
Value at risk (VaR) is a measure of the risk of loss of investment/capital. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses. For a given portfolio, time horizon, and probability ''p'', the ''p'' VaR can be defined informally as the maximum possible loss during that time after excluding all worse outcomes whose combined probability is at most ''p''. This assumes mark-to-market pricing, and no trading in the portfolio. For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, that means that there is a 0.05 probability that the portfolio will fall in value by $1 million or more over a one-day period if there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day out of 20 days (because of 5% p ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk Management
Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (security), threats) including uncertainty in Market environment, international markets, political instability, dangers of project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities, credit risk, accidents, Natural disaster, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root cause analysis, root-cause. Retail traders also apply risk management by using fixed percentage position sizing and risk-to-reward frameworks to avoid large drawdowns and support consistent decision-making under pressure. There are two types of events viz. Risks and Opportunities. Negative events can be classified as risks while positive events are classifi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
FRTB
The Fundamental Review of the Trading Book (FRTB), is a set of proposals by the Basel Committee on Banking Supervision for a new market risk-related capital requirement for banks. Background The reform, which is part of Basel III, is one of the initiatives taken to strengthen the financial system, noting that the previous proposals (Basel II) did not prevent the 2008 financial crisis. It was first published as a ''Consultative Document'' in October 2013. Following feedback received on the consultative document, an initial proposal was published in January 2016, which was revised in January 2019. Key features The FRTB revisions address deficiencies relating to the existing ''International Convergence of Capital Measurement and Capital Standards'' Basel Committee on Banking Supervisio ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Capital Requirement
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and risk becoming insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds, not a use of funds. From the 1880s to the end of the First World War, the capital-to-assets ratios globally declined sharply, before remaining relatively steady during the 20th century. Reg ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basis Risk
Basis risk in finance is the risk associated with imperfect hedging due to the variables or characteristics that affect the difference between the futures contract and the underlying "cash" position. It arises because of the difference between the price of the asset to be hedged and the price of the asset serving as the hedge before expiration, namely b = S - F. Barring idiosyncratic influence by the other aspects to be enumerated just below, by the time of expiration this simple difference will be eliminated by arbitrage. The other aspects that give rise to basis risk include: # Quality (grade) arising when the hedge in place has a different grade which is not perfectly correlated with the basis; # Timing arising due to mismatch between the expiration date of the hedge asset and the actual selling date of the underlying asset; # Location (leading to Transportation Costs) arising due to the difference in the location of the asset being hedged and the asset serving as the hedge, and ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
