14.1 Value at risk Chapter 14 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 14.1 Value at Risk Chapter 14
14.2 The question Being asked in Value at Risk (Var) What loss level is such that we are x%o confident it will not be exceeded in n business days? Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 14.2 The Question Being Asked in Value at Risk (VaR) “What loss level is such that we are X% confident it will not be exceeded in N business days?
14.3 Meaning is Probability Y-N(0,o2) Pr(r<pm=a po=n(a) Options, Futures, and Other Derivatives, 4th edition 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 14.3 Meaning is Probability 2 (0, ) Pr( ) ( ) * Y N Y p p N = = (1-) % % Z
14.4 VaR and regulatory capital Regulators require banks to keep capital for market risk equal to the average of VaR estimates for past 60 trading days using X=99 and N=10, times a multiplication factor (Usually the multiplication factor equals 3) Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 14.4 VaR and Regulatory Capital Regulators require banks to keep capital for market risk equal to the average of VaR estimates for past 60 trading days using X=99 and N=10, times a multiplication factor. (Usually the multiplication factor equals 3)
14.5 Advantages of VaR It captures an important aspect of risk in a single number It is easy to understand It asks the simple question: How bad can things get?” Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 14.5 Advantages of VaR • It captures an important aspect of risk in a single number • It is easy to understand • It asks the simple question: “How bad can things get?