37

Bank Risk Exposure and Value-at-Risk

In this chapter we review the main market risk measurement tool used in banking, known as Value-at-Risk. The review looks at the three main methodologies used to calculate VaR, as well as some of the key assumptions used in the calculations, including those on the normal distribution of returns, volatility levels and correlations. We also consider the range of trading market risks that a bank is exposed to.

37.1 Value-at-Risk

The introduction of Value-at-Risk (VaR) as an accepted methodology for quantifying market risk, and its adoption by bank regulators is part of the evolution of risk management. The application of VaR has been extended from its initial use in securities houses to commercial banks and corporates, ...

Get Bond and Money Markets: Strategy, Trading, Analysis now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.