Market Risk https://store.theartofservice.com/the-market-risk-toolkit.html.

Market Risk

Euro Exchange rate risk
One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe" These reductions in market risk "were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe".

Basel II Objective Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques;

Basel II The accord in operation
The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.

Basel II The first pillar
The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage.

Basel II The first pillar
For market risk the preferred approach is VaR (value at risk).

Basel II November 2005 update
On November 15, 2005, the committee released a revised version of the Accord, incorporating changes to the calculations for market risk and the treatment of double default effects. These changes had been flagged well in advance, as part of a paper released in July 2005.

Basel II July 2006 update On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework

Basel II January 16, 2009 update
For public consultation, a series of proposals to enhance the Basel II framework was announced by the Basel Committee. It releases a consultative package that includes: the revisions to the Basel II market risk framework; the guidelines for computing capital for incremental risk in the trading book; and the proposed enhancements to the Basel II framework.

Risk management - Areas of risk management
The Basel II framework breaks risks into market risk (price risk), credit risk and operational risk and also specifies methods for calculating capital requirements for each of these components.

Risk management - Enterprise risk management
In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, liquidity risk, market risk, and operational risk.

Extreme risk - Bank operational risk
Banks need to evaluate the risk of adverse events other than credit risks and market risks

Clearing house (finance) - Operation
The Central Counterparty does not face any market risk as it has two offsetting positions

Clearing house (finance) - Comparison
However a trader as well as dealing with the market risk needs to assess the counterparty risk for the counterparty and when trading

Futures contract - Margin
Customer margin Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance bond margin.

Risk - Basic definitions
# Securities trading: The probability of a loss or drop in value. Trading risk is divided into two general categories: (1) Systematic risk affects all securities in the same class and is linked to the overall capital-market system and therefore cannot be eliminated by diversification. Also called market risk. (2) Nonsystematic risk is any risk that isn't market-related or is not systemic. Also called nonmarket risk, extra-market risk, diversifiable risk, or unsystemic risk.

Risk - Insurance Insurance Risk is often taken by insurance companies, who then bear a pool of risks including market risk, credit risk, operational risk, interest rate risk, mortality risk, longevity risks, etc.James M. Carson; Elyas Elyasiani; Iqbal Mansur(December 2008), Market Risk, Interest Rate Risk, and Interdependencies in Insurer Stock Returns: A System-GARCH Model, The Journal of Risk and Insurance, , 12/2008, Volume 75, Issue 4, pp. 873–891, doi: /j x

Finance - Corporate finance
In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.

Tobacco - China While this price is guaranteed, it is lower than the natural market price, because of the lack of market risk

Underwriting - Risk, exclusivity, and reward
In summary, the securities issuer gets cash up front, access to the contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price. The underwriter gets a nice profit from the markup, plus possibly an exclusive sales agreement.

Underwriting - Risk, exclusivity, and reward
This practice, which is typically justified as the reward for the underwriter for taking on the market risk, is occasionally criticized as unethical, such as the allegations that Frank Quattrone acted improperly in doling out hot initial public offering|IPO stock during the dot com bubble.

Economic capital In finance, mainly for financial services firms, 'economic capital' is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market risk, credit risk, and operational risk. It is the amount of money which is needed to secure survival in a worst case scenario. Firms and financial services regulators should then aim to hold risk capital of an amount equal at least to economic capital.

Chief Procurement Officer
Globalization, compliance pressures, supply market risk and E-procurement|procurement automation have simultaneously elevated the visibility of the procurement discipline within companies and increased supply management challenges

Lean Startup Ries' overall claim is that if startups invest their time into iteratively building products or services to meet the needs of early customers, they can reduce the market risks and sidestep the need for large amounts of initial project funding and expensive product launches and failures.Roush, Wade

Health economics - Health care markets
Features of insurance market risk pools, such as group purchases, preferential selection (cherry-picking), and preexisting condition exclusions are meant to cope with adverse selection.

Arbitrage - Conditions for arbitrage
The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete

Arbitrage - Conditions for arbitrage
True arbitrage requires that there be no market risk involved

Corporate finance - Financial risk management
Financial risk management, typically, is focused on the impact on corporate value due to adverse changes in commodity|commodity prices, interest rates, exchange rate|foreign exchange rates and stock|stock prices (market risk)

Corporate finance - Financial risk management
Firstly, firm exposure to business and market risk is a direct result of previous capital financial investments

Natural gas storage - Storage development cost
The higher expected return from unregulated projects is due to the higher perceived market risk

Capital asset pricing model
The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity Beta (finance)|beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free interest rate|risk-free asset

European Banking Authority - Common Reporting Framework
It covers credit risk, market risk, operational risk, own fund and capital adequacy ratios

Investment banks - Risk management
Front office market risk activities provide service to investors via derivative solutions, portfolio management, portfolio consulting, and risk advisory

Electronic Clearing Service - Operation
The Central Counterparty does not face any market risk as it has two offsetting positions

Electronic Clearing Service - Comparison
However a trader as well as dealing with the market risk needs to assess the counterparty risk for the counterparty and when trading

Dennis Tito - Life and career
Wilshire relies on the field of quantitative analytics, which uses mathematical tools to analyze market risks - a methodology Tito is credited with helping to develop by applying the same techniques he used to determine a spacecraft's path at JPL

Hedge funds - Miscellaneous
*Multi-strategy: a hedge fund using a combination of different strategies to reduce market risk.

Hedge funds - Risk Managers of hedge funds use particular trading strategies and instruments with the specific aim of reducing market risks to produce risk-adjusted returns, which are consistent with investors' desired level of risk

Margin on Services * a risk-free discount rate is used (unless there is market risk in the projections)

Build-Operate-Transfer - BOT (build–operate–transfer)
*Financing risk: foreign exchange rate risk and interest rate fluctuation, market risk (change in the price of raw materials), income risk (over-optimistic cash-flow forecasts), cost overrun risk

HDFC Bank - Treasury The bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market Debt Securities, and Equities. These services are provided through the bank's Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.

Jim Cramer - Action Alerts charitable trust
“If we adjust for his market risk, we come up with an excess return that is essentially zero”, Bolster said, adding that “zero”, in this case, means his returns are roughly in line with the risk he’s taking on.

Operational risk credit risk is exploited by lending institutions to create profit, market risk is exploited by traders and fund managers, and insurance risk is exploited by insurers)

Operational risk - Background
Since the mid-1990s, the topics of market risk and credit risk have been the subject of much debate and research, with the result that financial institutions have made significant progress in the identification, measurement and management of both these forms of risk. However, it is worth mentioning that the near collapse of the U.S. financial system in September 2008 is a clear indication that our ability to measure market and credit risk is far from perfect.

Operational risk - Background
Events such as the September 11 terrorist attacks, rogue trading losses at Société Générale, Barings, Allied Irish Banks|AIB, UBS and National Australia Bank serve to highlight the fact that the scope of risk management extends beyond merely market risk|market and credit risk.

Operational risk - Difficulties
It is relatively straightforward for an organization to set and observe specific, measurable levels of market risk and credit risk because models exist which attempt to predict the potential impact of market movements, or changes in the cost of credit

Value at risk In financial mathematics and financial risk management, 'value at risk' ('VaR') is a widely used risk measure of the market risk|risk of loss on a specific Portfolio (finance)|portfolio of financial assets

Value at risk - History of VaR
Worldwide adoption of the Basel II Accord, beginning in 1999 and nearing completion today, gave further impetus to the use of VaR. VaR is the preferred Measure (mathematics)|measure of market risk, and concepts similar to VaR are used in other parts of the accord.

Financial statements - Management discussion and analysis
MDA typically describes the corporation's Accounting liquidity|liquidity position, capital resources,[ Nico Resources Management's Discussion and Analysis] results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as mergers and acquisitions or share buybacks), positive and negative trends, effects of inflation, domestic and international market risks,[ PepsiCo Management's Discussion and Analysis] and significant uncertainties.

Bain Capital - Brookside Capital
Brookside Capital is the hedge fund|public equity affiliate of Bain Capital. Established in October 1996, Brookside's primary objective is to invest in securities of publicly traded companies that offer opportunities to realize substantial long-term capital appreciation. Brookside employs a long/short equity strategy to reduce market risk in the portfolio[ Brookside Capital] (company website)

Financial risk management
'Financial risk management' is the practice of creating economic value in a business|firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.

Financial risk management - When to use financial risk management
This suggests that firm managers likely have many opportunities to create value for shareholders using financial risk management. The trick is to determine which risks are cheaper for the firm to manage than the shareholders. A general rule of thumb, however, is that market risks that result in unique risks for the firm are the best candidates for financial risk management.

Interest rate risk - Interest rate risk at banks
The widely deployed CAMELS rating system assesses a financial institution's: (C)apital adequacy, (A)ssets, (M)anagement Capability, (E)arnings, (L)iquidity, and (S)ensitivity to market risk

Professional Risk Managers' International Association
* Risk Management Practices (economic capital, regulatory capital, capital adequacy, operational risk, credit risk, market risk)

Market risk 'Market risk' is the risk of losses in positions arising from movements in market prices.Bank for International Settlements: A glossary of terms used in payments and settlement systems [

Some market risks include:
Market risk - Types Some market risks include:

Market risk - 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 (VaR). The conventions of using VaR are well established and accepted in the short-term risk management practice.

Market risk - Use in annual reports of U.S. corporations
In the United States, a section on market risk is mandated by the United States Securities and Exchange Commission|SECFAQ on the United States [ SEC Market Disclosure Rules] in all annual reports submitted on Form 10-K

TD Securities Key areas of business include managing corporate finance and lending, merger and acquisitions strategic advisory services, market risk management, debt and equity securities, derivative products, daily trading and investment, and multiple other areas of finance

Bank - Risk and capital * Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.

BMO Capital Markets 'BMO Capital Markets' is investment banking subsidiary of Canadian Bank of Montreal. The company offers corporate, institutional and government clients access to a range of financial services. These include equity and debt underwriting, corporate lending and project financing, merger and acquisitions advisory services, securitization, treasury management, market risk management, debt and equity research and institutional sales and trading.

Liquidity risk - Types of liquidity risk
'Market liquidity' – An asset cannot be sold due to lack of liquidity in the market – essentially a sub-set of market risk. This can be accounted for by:

Liquidity risk - Causes of liquidity risk
If a trading organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk

Liquidity risk - Causes of liquidity risk
It is debatable whether the hedge was effective from a market risk standpoint, but it was the liquidity crisis caused by staggering margin calls on the futures that forced Metallgesellschaft to unwind the positions.

Tier 1 capital - Tier 1 capital ratio
It contains components for Market Risk (typically based on value at risk (VAR) ) and Operational Risk

Discounting - Discount rate
'3. Equity Market Risk Premium': The return on investment that investors require above the risk free rate.

Discounting - Discount rate
'Discount rate'= risk free rate + beta*(equity market risk premium)

Canadian Imperial Bank of Commerce - Corporate governance
* Leslie Rahl (2007) B.Sc., M.B.A.; Founder and Managing Partner, Capital Market Risk Advisors, Inc.

Office of the Comptroller of the Currency - Duties and functions
By monitoring Capital (economics)|capital, asset quality, management, earnings, liquidity, sensitivity to market risk, information technology, consumer compliance, and community reinvestment, the OCC is able to determine whether or not the bank is operating safely and soundly, and meeting all regulatory requirements

Internal Ratings-Based Approach (Credit Risk) - Rating System Operations
Banks are also required to regularly stress test their rating systems considering economic downturn scenarios, market risk based events or liquidity conditions that may increase the level of capital held by the bank. These stress tests should not only consider the relevant internal data of the bank, but also macro-economic factors that might affect the accuracy of the rating system.

Systemic risk - Explanation
Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade.

Systemic risk - Diversification
Systemic risk, also called market risk or un-diversifiable risk, is a risk of security (finance)|security that cannot be reduced through Diversification (finance)|diversification

Master of Quantitative Finance
In general, these degrees aim to prepare students for roles as quants (quantitative analysts), including quantitative analyst|analysis, Investment_banking#Organizational_structure_of_an_investment_bank|structuring, trader (finance)|trading, and investment management|investing; in particular, these degrees emphasize Derivative (finance)|derivatives and fixed income, and the hedge (finance)|hedging and financial risk management|management of the resultant market risk|market and credit risk

Foreign exchange risk - Value at Risk
Banks in Europe have been authorized by the Bank for International Settlements to employ VAR models of their own design in establishing capital requirements for given levels of market risk

Lionel Jospin - Prime Minister
A state-supervised reserve fund for old-age insurance was established, which created marginal capital coverage and was designed to protect pension levels from financial-market risks

Investment management - Risk-adjusted performance measurement
For example, Fama and French (1993) have highlighted two important factors that characterize a company's risk in addition to market risk

Working capital management - Financial risk management

Financial risk - Liquidity risk
*Asset liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of market risk. This can be accounted for by:

Financial risk - Market risk
The four standard market risk factors are equity risk, interest rate risk, currency risk, and commodity risk:

Futures contract - Margin
'Customer margin' Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are responsible for overseeing customer margin accounts. Margins are determined on the basis of market risk and contract value. Also referred to as performance bond margin.

Troubled Asset Relief Program - Expenditures and commitments
The subsidy cost is defined as, broadly speaking, the difference between what the Treasury paid for the investments or lent to the firms and the market value of those transactions, where the assets in question were valued using procedures similar to those specified in the Federal Credit Reform Act (FCRA), but adjusting for market risk as specified in the EESA

Capital accumulation - Different forms of capital accumulation
The propensity to invest in production therefore depends a lot on expectations of Profit (economics)|profitability and sales volume, and on perceptions of market risk

Algorithmic trading - Conditions for arbitrage
The long and short transactions should ideally occur simultaneously to minimize the exposure to market risk, or the risk that prices may change on one market before both transactions are complete

Fixed income - Risks * market risk – the risk of market-wide changes affecting the value of the security

Liquidity - Overview The risk of illiquidity need not apply only to individual investments: whole portfolios are subject to market risk

High-yield debt - Risk The holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk, duration risk, Convexity (finance)|convexity risk, repayment of principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk, political risk, and taxation adjustment risk

Money market fund - Explanation
Money market funds seek to limit exposure to losses due to credit risk|credit, market risk|market, and liquidity risk|liquidity risks

Greenshoe - Greenshoe option
The underwriters can do this without the market risk of being long this extra 15% of shares in their own account, as they are simply covering (closing out) their short position.

Cost of capital - Cost of equity
βsThe sensitivity to market risk for the security

Risk model Risk modeling uses a variety of techniques including market risk, value at risk (VaR), historical simulation (HS), or extreme value theory (EVT) in order to analyze a portfolio and make forecasts of the likely losses that would be incurred for a variety of risks. Such risks are typically grouped into credit risk, liquidity risk, market risk, and operational risk categories.

E*TRADE - Subprime portfolio problems
The transaction removed the assets with the greatest market risk from E-Trade's consolidated balance sheet—their $3 billion Asset-backed security|asset-backed securities (ABS) portfolio, including its ABS collateralized debt obligations (CDOs) and second lien securities

Diversification (finance) - Maximum diversification
Market Risk and Systematic risk are the same thing when the underlying assets are capital market assets (such as stocks and bonds and funds). Increased exposure to the classically defined Market therefore increases market risk, increases systematic risk and decreases systematic diversification. As such index fund approaches can be very antagonist to effective diversification.

Diversification (finance) - Diversifiable and non-diversifiable risk
The Capital Asset Pricing Model introduced the concepts of diversifiable and non-diversifiable risk. Synonyms for diversifiable risk are idiosyncratic risk, unsystematic risk, and security-specific risk. Synonyms for non-diversifiable risk are systematic risk, beta (finance)|beta risk and market risk.

Shadow banking system - Risks or vulnerability
From a technical standpoint, these institutions are subject to market risk, credit risk and especially liquidity risk, since their liabilities are short term while their assets are more long term and illiquid

EUR - Exchange rate risk
One of the advantages of the adoption of a common currency is the reduction of the risk associated with changes in currency exchange rates. It has been found that the introduction of the euro created significant reductions in market risk exposures for nonfinancial firms both in and outside of Europe. These reductions in market risk were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe.

Reserve Bank of Australia - Payments System Board and the ACCC
If members of a payment system are at odds over issues of market risk, admission, safety, and rivalry, the RBA can additionally administer arbitration with the consent of those involved

Pharmaceutical industry in the People's Republic of China - Domestic companies
In most cases, the agents buy the pharmacy products with cash after weighing the costs and profits, and the market risks lie with the wholesalers.

Boomerang Generation - Support
Such co-residence can be a valuable form of insurance, particularly for youths from poorer families.[ Federal Reserve Bank of Minneapolis, Moving Back Home: Insurance Against Labor Market Risk, March 2010] It may also provide non-negligible income to the parents, though in many cultures, the young person retains all or nearly all of this income for disposable income purchases.

National Australia Bank - Financial results
These are aimed at servicing the needs of corporate and institutional customers, which include market risk management (e.g

Underwriters - Risk, exclusivity, and reward
This practice, which is typically justified as the reward for the underwriter for taking on the market risk, is occasionally criticized as unethical, such as the allegations that Frank Quattrone acted improperly in doling out hot initial public offering|IPO stock during the dot com bubble.

Value investing - Criticism
Some analysts believe that two investors can analyze the same information and reach different conclusions regarding the intrinsic value of the company, and that there is no systematic or standard way to value a stock.[ In other words, a value investing strategy can only be considered successful if it delivers excess returns after allowing for the risk involved, where risk may be defined in many different ways, including market risk, multi-factor models or idiosyncratic risk.

Bought deal #The issuer/client may only be willing to do a deal if it is bought (as it eliminates execution or market risk.)

Short (finance) - History
A few years later, in 1949, Alfred Winslow Jones founded a fund (that was unregulated) that bought stocks while selling other stocks short, hence hedging some of the market risk, and the hedge fund was born.

Proprietary trading - Arbitrage
The trade will remain subject to various non-market risks, such as settlement risk and other operational risks

Security market line - Formula
The Y-intercept of the SML is equal to the risk-free interest rate. The slope of the SML is equal to the market risk premium and reflects the risk return trade off at a given time:

Day trading - Financial settlement
But today, to reduce market risk, the settlement period is typically three working days

Pairs trade - Drift and risk management
*In ‘market-neutral’ strategies, you are assuming that the CAPM model is valid and that beta is a correct estimate of systematic risk—if this is not the case, your hedge may not properly protect you in the event of a shift in the markets. Note there are other theories on how to estimate market risk—such as the Fama-French Factors.

Pairs trade - Drift and risk management
*Measures of market risk, such as Beta coefficient|beta, are historical and could be very different in the future than they have been in the past.

Cultivation of tobacco - China
While this price is guaranteed, it's lower than the natural market price because of the lack of market risk

Ulcer Index The 'ulcer index' is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987,[ Peter Martin's Ulcer Index page] and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period.

Alfred Winslow Jones - The birth and development of the hedge fund concept
He used Leverage (finance)|leverage to buy more shares, and used Short (finance)|short selling to avoid market risk

Treynor ratio The 'Treynor ratio' (sometimes called the 'reward-to-volatility ratio' or 'Treynor measure'), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e.g., United States Treasury security#Treasury bill|Treasury bills or a completely diversified portfolio), per each unit of market risk assumed.

Liquid asset - Overview
The risk of illiquidity need not apply only to individual investments: whole portfolios are subject to market risk

Long/short equity - Overview
A fund manager typically attempts to reduce volatility (finance)|volatility by either diversifying or hedging positions across individual regions, industries, sectors and market capitalization bands and hedging against un-diversifiable risk such as market risk. In addition to being required of the portfolio as a whole, neutrality may in addition be required for individual regions, industries, sectors, and market capitalization bands.

Long/short equity - Market neutral strategies
Market neutrality refers to hedging out market risk, which can be managed through the use of derivatives, such as futures on market indexes. Market neutral funds usually seek to hedge against most or all predictable risk exposures.

Equity market neutral An investment strategy or Portfolio (finance)|portfolio is considered 'market-neutral' if it seeks to avoid some form of market risk entirely, typically by hedge (finance)|hedging. In order to evaluate market-neutrality, it is necessary to specify the risk being avoided. For example, convertible arbitrage attempts to fully hedge fluctuations in the price of the underlying common stock.

Government Accountability Project - Eric Ben-Artzi
Ben-Artzi joined Deutsche Bank in 2010 as a quantitative risk analyst in the company's Market Risk Management department

Bridgewater Associates - Separation of Alpha and Beta
The company divides its investments into two basic categories: 1) Beta (finance)|Beta investments, whose returns are generated through passive management and standard market risk, and 2) Alpha (finance)|Alpha investments, whose goal is to generate higher returns that are uncorrelated to the general market and are actively managed

Risk (magazine) It includes papers on Option (finance)|option pricing and hedging, market risk, credit risk, Swap (finance)|swaps and Monte Carlo methods

Specific risk In a balanced portfolio of assets there'd be a spread between general market risk and risks specific to individual components of that portfolio

Specific risk Unlike systematic risk or market risk, specific risk can be diversified away.In fact, most unsystematic risk is removed by holding a portfolio of about twenty-five to thirty securities.

130/30 'Portable alpha' is the return of an investment portfolio with zero market risk (Beta (finance)|beta). Being independent of both the direction and the magnitude of the market's movements, it represents the manager's skill in selecting investments. Elimination of the market risk can be accomplished by means of short selling and derivatives such as Futures contract|futures, swaps, and option (finance)|options.

130/30 - Example of Portable Alpha
Based on his beta (market risk), his portfolio should have returned 8.5% less than the risk free asset, but his skill in picking market capitalization|small-cap stocks resulted in his portfolio only declining 5% below the risk-free rate

130/30 - Usage of a Portable Alpha manager
Because market risk is eliminated, an investor might be convinced to invest in asset classes that he may not otherwise wish to invest in, as long as the investor has confidence in the skill of the investment manager

Hedge accounting - Why is hedge accounting necessary?
All entities are exposed to some form of market risk. For example, gold mines are exposed to the price of gold, airlines to the price of jet fuel, borrowers to interest rates, and importers and exporters to exchange

Risk adjusted return on capital - Basic formula
Economic capital is a function of market risk, credit risk, and operational risk, and is often calculated by VaR

Covered warrant - Risks
The main exposure is to market risk as the warrant will be profitable only when the market price exceeds the strike price for a call warrant or is below the strike for a put warrant

Basel II Accord - Objective
# Ensuring that credit risk, operational risk and market risk are quantified based on data and formal techniques;

Basel II Accord - July 2006 update
On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework

Basel II Accord - January 16, 2009 update
For public consultation, a series of proposals to enhance the Basel II framework was announced by the Basel Committee. It releases a consultative package that includes: the revisions to the Basel II market risk framework; the guidelines for computing capital for incremental risk in the trading book; and the proposed enhancements to the Basel II framework.[ Revisions to the Basel II market risk framework]

News analytics - Financial Risk Management
The objective of financial risk management is to create economic value in a firm or to maintain a certain risk profile of an investment portfolio by using financial instruments to manage risk exposures, particularly credit risk and market risk

Bond convexity - Application of convexity
#Convexity is a risk management figure, used similarly to the way Gamma (finance)|'gamma' is used in derivatives risks management; it is a number used to manage the market risk a bond portfolio is exposed to. If the combined convexity and duration of a trading book is high, so is the risk. However, if the combined convexity and duration are low, the book is hedge (finance)|hedged, and little money will be lost even if fairly substantial interest movements occur. (Parallel in the yield curve.)

Cox–Ingersoll–Ross model
In mathematical finance, the 'Coxndash;Ingersollndash;Ross model' (or 'CIR model') describes the evolution of interest rates. It is a type of one factor model (short rate model) as it describes interest rate movements as driven by only one source of market risk. The model can be used in the valuation of interest rate derivatives. It was introduced in 1985 by John C. Cox, Jonathan E. Ingersoll and Stephen Ross (economist)|Stephen A. Ross as an extension of the Vasicek model.

Cox–Ingersoll–Ross model - The model
where W_t is a Wiener process (modelling the random market risk factor) and a , b , and \sigma\, are the parameters. The parameter a corresponds to the speed of adjustment, b to the mean and \sigma\, to volatility. The drift factor, a(b-r_t), is exactly the same as in the Vasicek model. It ensures mean reversion (finance)|mean reversion of the interest rate towards the long run value b, with speed of adjustment governed by the strictly positive parameter a.

Harry Markowitz - Choosing the best Portfolio
(RM - IRF)/σM is the slope of CML. (RM - IRF) is a measure of the risk premium, or the reward for holding risky portfolio instead of risk-free portfolio. σM is the risk of the market portfolio. Therefore, the slope measures the reward per unit of market risk.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Form 10-K - Parts ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Conditional Value-at-Risk
'Expected shortfall (ES)' is a risk measure, a concept used in finance (and more specifically in the field of financial risk measurement) to evaluate the market risk or credit risk of a portfolio. It is an alternative to value at risk that is more sensitive to the shape of the loss distribution in the tail of the distribution. The expected shortfall at q% level is the expected return on the portfolio in the worst q% of the cases.

Technical change From a capital finance point of view, advances in technology are the classic definition of systemic market risk

Vasicek model It is a type of one-factor model (more precisely, one factor short rate model) as it describes interest rate movements as driven by only one source of market risk

Vasicek model - Details
where Wt is a Wiener process under the risk neutral framework modelling the random market risk factor, in that it models the continuous inflow of randomness into the system

Solar Renewable Energy Certificates - Spot sales
Spot price for SRECs are generally higher than prices found in long-term contracts since the system owner is taking on market risk

Interest rate swap - Risks
*Market Risk: A typical swap consists of two legs, one fixed, the other floating. The risks of these two component will naturally differ. Newcomers to market finance may think that the risky component is the floating leg, since the underlying interest rate floats, and hence, is unknown. This first impression is wrong. The risky component is in fact the fixed leg and it is very easy to see why this is so.

Discounted - Discount rate
: 'Discount rate' = (risk free rate) + beta * (equity market risk premium)

Trading room - Risk-management
Deal capture of transactions by traders, position-keeping, measure of market risks (interest-rates and foreign exchange), calculation of Profit Loss (PL), per desk or trader, control of limits set per counterparty, are the main functionalities delivered by these systems.

Social Security reform - Rate of return and individual initiative
Debate has ensued over the advisability of subjecting workers' retirement money to market risks.

Repurchase agreement - Uses
The concept of a matched-book trade follows closely to that of a broker who takes both sides of an active trade, essentially having no market risk, only credit risk

Credit-linked note - Emerging Market CLN
From a market risk perspective owning a CLN is almost identical to owning the local debt

Chen model In finance, the 'Chen model' is a mathematical model describing the evolution of interest rates. It is a type of three-factor model (short rate model) as it describes interest rate movements as driven by three sources of market risk. It was the first stochastic mean and stochastic volatility model and it was published in 1994 by economist Lin Chen, a Harvard doctorate, former US Federal Reserve Board economist, and professor of Yonsei University of Korea and Nanyang Tech University of Singapore.

Bank Mandiri It also has Capital Adequacy Ratio (CAR) of 16,08% (including market risk), Return on Asset (RoA) of 3.45%, and Return on Equity (RoE) of 22.18%

Health savings account - Criticism
HSA funds that are not held in savings accounts insured by the Federal Deposit Insurance Corporation are subject to market risk, as is any other investment. While the potential upside from investment gains can be viewed as a benefit, the subsequent downside, as well as the possibility of capital loss, may make the HSA a poor option for some.

Paris Dauphine University - Master programs
The Financial Engineering and Quantitative Economics Programme 272 prepares students to topics such as the techniques of quantitative finance, corporate finance, asset management and market risk management. For this, the curriculum combines the teaching of financial theory and its application in business while training students for computational methods in finance.

Charles Davis Tillman - Life’s Railway to Heaven
together with a tune attributed to himself, in an age when being in any way associated with Mormon lyrics would have been fraught with market risk for Tillman

History of the British Raj - Effects on the economy
However, unlike Britain itself, where the market risks for the infrastructure development were borne by private investors, in India, it was the taxpayersmdash;primarily farmers and farm-labourersmdash;who endured the risks, which, in the end, amounted to £50 million

Jaws (franchise) - Box office
This was attractive to studios because it reduced market risk

Ex-Im Bank - Criticism Using a fair-value estimate, which incorporates market risk, finds “This simple approach – which is based on a method outlined in a National Bureau of Economic Research paper by Debbie Lucas of the Massachusetts Institute of Technology – suggests that the Ex-Im bank’s long-term loan guarantee program actually provides guarantees at a loss for taxpayers, not a profit

Marcel Rohner (banker) - Biography
Between 1993 and 1998, Rohner was with Swiss Bank Corporation’s Investment Banking branch, where in 1995 he was appointed Head of Market Risk Control Europe.

Marcel Rohner (banker) - Biography
In 1998, he worked as Head of Market Risk Control of Warburg Dillon Read. In 1999, he was promoted to Group Chief Risk Officer.

Basel 4 - History The Basel Committee on Banking Supervision released a consultative paper, seeking out views on the Committee's plan to change how capital requirements and market risks are calculated.

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