market risk

• Market Risk

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

Euro Exchange rate risk

1 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

1 Ensuring that credit risk, operational risk and market risk are quantified

based on data and formal techniques;


Basel II The accord in operation

1 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

1 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

1 For market risk the preferred approach is VaR (value at risk).


Basel II November 2005 update

1 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

1 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

1 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

1 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

1 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

1 Banks need to evaluate the risk of adverse events other than credit risks and market

risks


Clearing house (finance) - Operation

1 The Central Counterparty does not face any market risk as it has two offsetting positions


Clearing house (finance) - Comparison

1 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

1 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

1 # 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

1 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: 10.1111/j.1539-6975.2008.00289.x


Finance - Corporate finance

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 True arbitrage requires that there be no market

risk involved


Corporate finance - Financial risk management

1 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

1 Firstly, firm exposure to business and market risk is a direct result of

previous capital financial investments


Natural gas storage - Storage development cost

1 The higher expected return from unregulated projects is due to the higher perceived market

risk


Capital asset pricing model

1 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 assethttps://store.theartofservice.com/the-market-risk-toolkit.html

European Banking Authority - Common Reporting Framework

1 It covers credit risk, market risk, operational risk, own fund and capital adequacy ratios


Investment banks - Risk management

1 Front office market risk activities provide service to investors via derivative solutions, portfolio

management, portfolio consulting, and risk advisory


Electronic Clearing Service - Operation

1 The Central Counterparty does not face any market risk as it has two offsetting positions


Electronic Clearing Service - Comparison

1 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

1 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

1 *Multi-strategy: a hedge fund using a combination of different strategies to reduce

market risk.


Hedge funds - Risk

1 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

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


Build-Operate-Transfer - BOT (build–operate–transfer)

1 *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

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

Jim Cramer - Action Alerts charitable trust

1 “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

1 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

1 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

1 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

1 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

1 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

1 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

1 MDA typically describes the corporation's Accounting liquidity|liquidity position, capital

resources,[http://www.nikoresources.com/2002manage.html 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,[http://www.pepsico.com/Annual-Reports/1998/financial/analysis.html PepsiCo Management's Discussion and

Analysis] and significant uncertainties.


Bain Capital - Brookside Capital

1 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[http://www.brooksidefund.com Brookside Capital] (company website)


Financial risk management

1 '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

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

Interest rate risk - Interest rate risk at banks

1 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

1 * Risk Management Practices (economic capital, regulatory capital,

capital adequacy, operational risk, credit risk, market risk)


Market risk

1 '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 [http://www.bis.org/publ/cpss00b.pdf]


Market risk - Types

1 Some market risks include:


Market risk - Measuring the potential loss amount due to market risk

1 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

1 In the United States, a section on market risk is mandated by the

United States Securities and Exchange Commission|SECFAQ on

the United States [http://www.sec.gov/divisions/corpfin/

guidance/derivfaq.htm SEC Market Disclosure Rules] in all annual reports

submitted on Form 10-K


TD Securities

1 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

1 * 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

1 '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

1 '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

1 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

1 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

1 It contains components for Market Risk (typically based on value at risk

(VAR) ) and Operational Risk


Discounting - Discount rate

1 '3. Equity Market Risk Premium': The return on investment that investors

require above the risk free rate.


Discounting - Discount rate

1 'Discount rate'= risk free rate + beta*(equity

market risk premium)


Canadian Imperial Bank of Commerce - Corporate governance

1 * 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

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 *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

1 The four standard market risk factors are equity risk, interest rate risk,

currency risk, and commodity risk:


Futures contract - Margin

1 '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

1 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 EESAhttps://store.theartofservice.com/the-market-risk-toolkit.html

Capital accumulation - Different forms of capital accumulation

1 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

1 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

1 * market risk – the risk of market-wide changes affecting the value of the security


Liquidity - Overview

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


High-yield debt - Risk

1 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

1 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

1 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

1 βsThe sensitivity to market risk for the

security


Risk model

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 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

1 Such co-residence can be a valuable form of insurance, particularly for youths from

poorer families.[http://www.minneapolisfed.org/research/wp/wp677.pdf 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

1 These are aimed at servicing the needs of corporate and institutional

customers, which include market risk management (e.g


Underwriters - Risk, exclusivity, and reward

1 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

1 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.[http://www.jpmorgan.com/tss/General/Investment_Style/1159369368373] 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

1 #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

1 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

1 The trade will remain subject to various non-market risks, such as

settlement risk and other operational risks


Security market line - Formula

1 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

1 But today, to reduce market risk, the settlement period is typically three working

days


Pairs trade - Drift and risk management

1 *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.https://store.theartofservice.com/the-market-risk-toolkit.html

Pairs trade - Drift and risk management

1 *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

1 While this price is guaranteed, it's lower than the natural market price because of the lack of market risk


Ulcer Index

1 The 'ulcer index' is a stock market risk measure or technical analysis indicator

devised by Peter Martin in 1987,[http://www.tangotools.com/ui/ui.htm

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

1 He used Leverage (finance)|leverage to buy more shares, and used Short

(finance)|short selling to avoid market risk


Treynor ratio

1 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

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


Long/short equity - Overview

1 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

1 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

1 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

1 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

1 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 managedhttps://store.theartofservice.com/the-market-risk-toolkit.html

Risk (magazine)

1 It includes papers on Option (finance)|option pricing and hedging,

market risk, credit risk, Swap (finance)|swaps and Monte Carlo

methods


Specific risk

1 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

1 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

1 '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. https://store.theartofservice.com/the-market-risk-toolkit.html

130/30 - Example of Portable Alpha

1 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

1 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?

1 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

1 Economic capital is a function of market risk, credit risk, and operational risk, and is often

calculated by VaR


Covered warrant - Risks

1 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

1 # Ensuring that credit risk, operational risk and market risk are quantified based on data and formal

techniques;


Basel II Accord - July 2006 update

1 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

1 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.[http://www.bis.org/publ/bcbs148.pdf?noframes=1 Revisions to the Basel II market

risk framework]


News analytics - Financial Risk Management

1 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

1 #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

1 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

1 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

1 (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.


Form 10-K - Parts

1 ITEM 7A. Quantitative and

Qualitative Disclosures About

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

Conditional Value-at-Risk

1 '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

1 From a capital finance point of view, advances in technology are the

classic definition of systemic market risk


Vasicek model

1 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

1 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

1 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

1 *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.http://chicagofed.org/webpages/publicatio

ns/understanding_derivatives/index.cfm


Discounted - Discount rate

1 : 'Discount rate' = (risk free rate) + beta * (equity market risk

premium)


Trading room - Risk-management

1 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

1 Debate has ensued over the advisability of subjecting workers' retirement money to

market risks.


Repurchase agreement - Uses

1 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

1 From a market risk perspective owning a CLN is almost identical to owning the local debt


Chen model

1 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

1 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

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

Paris Dauphine University - Master programs

1 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

1 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

1 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

1 This was attractive to studios because it reduced market risk


Ex-Im Bank - Criticism

1 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

1 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

1 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

1 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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