Metallgesellschaft Case on Hedging Disasters
In MG, the underlyings were short positions in long-term forward contracts to deliver oil. The hedge was a stack-and-roll hedge: long positions in short-term futures contracts that were rolled over consecutively. The strategy depended on the ...
Surplus At Risk (SaR)
SaR is value at risk (VaR) for a pension fund.
Risk-adjusted Performance Ratios
RAPMs are variations of: return per unit of risk. Treynor and Sharpe are similar: both are excess return per unit of risk. Treynor defines risk as systematic risk (beta) and is therefore appropriate to well-diversified portfolios (i.e., into such ...
Security Market Line (SML)
The security market line (SML) plots the expected return of an asset (or portfolio) as a function of the asset's beta.
Capital Market Line (CML)
The capital market line is determined by a mix of: the riskfree asset and the market portfolio. The market portfolio, in turn, consists of all risky assets (this example has only two assets).
Marginal Value At Risk (marginal VaR)
This is a review which follows Jorion's (Chapter 7) calculation of marginal value at risk (marginal VaR). Marginal VaR requires that we calculate the beta of a position with respect to the portfolio.
Two-asset Portfolio Volatility
The very traditional (mean-variance) two asset portfolio volatility is largely a function of asset correlation/covariance.
CreditMetrics - Part 2
The next building block is mapping transitional probabilities to standard normal variables; then using a bivariate normal to capture joint probabilities of default
Bivariate Normal Distribution
The bivariate normal distribution (common in credit risk) gives the joint probability for two normally distributed random variables
CreditMetrics - Part 1
A review of the method used in the first building block of CreditMetrics, a ratings-based credit risk portfolio model
Valuation Of Credit Default Swap (CDS)
The key idea in valuing a CDS is a fair deal: the (probability-adjusted) expected PAYMENTS (i.e., made by protection buyer) should equal the expected PAYOFF (contingent, made by seller)
Operational Risk in Basel II
There are three approaches to operational risk in Basel II: basic indicator (BIA), standardized (SA), and advanced measurement approach (AMA). BIA is alpha (15%) of the bank’s total gross operating income (GOI). SA weights the charge by ...
Credit Risk Mitigation in Basel II
For secured (collateralized) exposures, the simple approach to CRM substitutes the risk-weight of the collateral (i.e., it operates on the risk-weight term of the formula). For secured (collateralized) exposures, the comprehensive approach adjusts ...
Basel Internal Ratings-based (IRB) Risk Weight Function
Basel's IRB determines a capital charge (K) = Credit Value at Risk (CVaR) @ 99.9% – Expected Loss (UL). This function is estimating an unexpected loss (UL).
Standard Approach To Credit Risk Under Basel II
The standard approach is a lookup table based on (i) external credit rating and (ii) the type of counterparty.