Measuring The Potential Loss Amount Due To Market Risk
As with other forms of risk, the potential loss amount due to market risk may be measured in a number of ways or conventions. Traditionally, one convention is to use Value at Risk. The conventions of using Value at risk is well established and accepted in the short-term risk management practice.
However, it contains a number of limiting assumptions that constrain its accuracy. The first assumption is that the composition of the portfolio measured remains unchanged over the specified period. Over short time horizons, this limiting assumption is often regarded as reasonable. However, over longer time horizons, many of the positions in the portfolio may have been changed. The Value at Risk of the unchanged portfolio is no longer relevant.
The Variance Covariance and Historical Simulation approach to calculating Value at Risk also assumes that historical correlations are stable and will not change in the future or breakdown under times of market stress.
In addition, care has to be taken regarding the intervening cash flow, embedded options, changes in floating rate interest rates of the financial positions in the portfolio. They cannot be ignored if their impact can be large.
Read more about this topic: Market Risk
Famous quotes containing the words measuring the, measuring, potential, loss, amount, due, market and/or risk:
“We recognize caste in dogs because we rank ourselves by the familiar dog system, a ladderlike social arrangement wherein one individual outranks all others, the next outranks all but the first, and so on down the hierarchy. But the cat system is more like a wheel, with a high-ranking cat at the hub and the others arranged around the rim, all reluctantly acknowledging the superiority of the despot but not necessarily measuring themselves against one another.”
—Elizabeth Marshall Thomas. “Strong and Sensitive Cats,” Atlantic Monthly (July 1994)
“By measuring individual human worth, the novelist reveals the full enormity of the State’s crime when it sets out to crush that individuality.”
—Ian McEwan (b. 1938)
“Much of what contrives to create critical moments in parenting stems from a fundamental misunderstanding as to what the child is capable of at any given age. If a parent misjudges a child’s limitations as well as his own abilities, the potential exists for unreasonable expectations, frustration, disappointment and an unrealistic belief that what the child really needs is to be punished.”
—Lawrence Balter (20th century)
“The greatest dangers have their allurements, if the want of success is likely to be attended with a degree of glory. Middling dangers are horrid, when the loss of reputation is the inevitable consequence of ill success.”
—Philip Dormer Stanhope, 4th Earl Chesterfield (1694–1773)
“The deed will be accomplished with the least amount of bloodshed possible, and, if possible ..., we’ll save all the souls and send them happily off to their abode.”
—François Rabelais (1494–1553)
“The resistance we make to our passions is due to their weakness, not our strength.”
—François, Duc De La Rochefoucauld (1613–1680)
“Forbede us thing, and that desiren we;
Preesse on us faste, and thanne wol we flee.
With daunger oute we al oure chaffare:
Greet prees at market maketh dere ware,
And too greet chepe is holden at litel pris.”
—Geoffrey Chaucer (1340?–1400)
“I’m a very smart guy. I haven’t a feeling or a scruple in the world. All I have the itch for is money. I am so money greedy that for twenty-five bucks a day and expenses, mostly gasoline and whisky, I do my thinking myself, what there is of it; I risk my whole future, the hatred of the cops ... I dodge bullets and eat saps, and say thank you very much, if you have any more trouble, I hope you’ll think of me, I’ll just leave one of my cards in case anything comes up.”
—Raymond Chandler (1888–1959)