FNCE30007 Lecture 12: Risk Management and Value at Risk
27 Jun 2018
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WEEKKSUMMARY
RISKMANANGEMENI
itheyPoints
soFAR focus on mktmils lequity commoditydint rate Different
tyresofmilk
our assumptionsexcluded credit liquidity operational Pink Management
rink Theloss Distribution
rimnamyqgonlyani
through
uncertainprices
of Yawning
afozinztribution
CREDITRISK mits that acounterparty willfailto computing var
executeon the teamsof acontract thing var
Thisis whywe havemargin requirements Problemswith VaR
a
prettybig deal in derivatives as mkts are a
zero sum game
LIQUIDITYRISK occurswhenthereis aquantityimpactofatrade on the
price obtained
hardto trade whenyouneed to can only buyhell acertain amount
at acertainfumie
MARKETPOWER buying alargequantityofany securitychangesthe
price
because thebuyerneedsto induce the ruler to sell
ASYMMETRIC INFO if onebelieves that aruler is informedatrellingbecame
the
security is worth less than its currentprice thesellingpricedeclines
big trades look like someone hasinfo
OPERATIONALladlegal RISK mils inherent intherunningofafinancialinstitution
Egsomeonetradingrogue
ReikManagunent
corporatefinancialNikemanagement is the managementof
theminofafirm's
equity capital
Mgmt acts on thebehalf
of owners ddecides
purchase arole of firmassets
accumulationoffirmliabilities
AEE equity is aresidual claim on thefwin
For mile mgmtpurposes equityholders are concernednot
thechanges in the
equity's value over apredeterminedtime interval Lt ttdtFor many
decisions Bt might be aday week or year
DEtEt no Ee DAT DLt
ThehanDistribution
Thewitsofachange in theequity valueis completelycharacterised byagaindirt
Prof DEte se Prob DAtAlt Eso for all valuesof so
The
probability that thefirm will becomeinsolvent overthetime interval Lt tthat
is Prof DEEEtProb DAT BLt EEt
The firmbecomesinvolventifthechanges inthe valueoftheequity is more
negative than the negative ofthe baiting valueofequity
When computing the loss distribution all millsneedto beincluded
we assume Debt is asinglezero couponbond
all ants ane jointly lognormallydistributed
At NLNlmao tr02IT 02T
Document Summary
Problemswith var equity is a residual claim on thefwin. E g someonetradingrogue our assumptionsexcluded credit liquidity operational rink rimnamyqgonlyanithroughuncertainpricesof. Creditrisk mits that a counterpartywillfailto executeon the teamsof a contract. This is whywe havemargin requirements aprettybig deal in derivatives as mkts are a zero sum game. Liquidityrisk occurswhenthereis a quantityimpactofatrade on the price obtained hardto trade whenyouneed to can only buyhell a certain amount at a certainfumie. Marketpower buying a largequantityofany security changestheprice becausethe buyerneedsto induce the ruler to sell. Asymmetric info if onebelieves that a ruler is informedatrellingbecamethe security is worth less than its currentprice thesellingprice declines. Weekksummary sofar focus on mkt mils lequity commoditydint rate. Mgmt acts on thebehalfof owners d decides purchase a roleof firmassets accumulationoffirmliabilities. For mile mgmtpurposes equityholders are concernednotthechanges in the equity"s value over a predeterminedtime interval lt t t d t. For many decisions bt might be a day week oryear. Thewitsof a change in the equity valueis completelycharacterised byagaindirt.
