金融风险--Measuring market risk VaR approach（PPT 58）

3. Measuring market risk: VaR approach
3.1 Introduction
3.2 Understanding VaR
3.3 Riskmetrics
3.4 Historic simulation
3.5 Mote-Carlo simulation
3.6 BIS standardized model

3.1 Introduction
Advantages of VaR approach (over sensitivity approach)
complete measure of risk,
Measuring risk using the same unit: dollar
Aggregate view  of a portfolio risk accounting for  leverage and correlation effects
integrated nature, not only derivatives but also all other financial instruments, and can be broadened from market risk to other types of financial risk
one-number indicator.

3.2 Understanding VaR
Questions leading us to VaR measure
Defining Value at Risk
Key elements of calculating VaR
What does PDF curve tell?
Approaches to probability distribution (types of VaR)
Working out VaR through a risk factor
Questions leading us to VaR measure
As a portfolio manager, you may be asked by your boss following questions:
   Q1: Given a market change or shock, how much
         could your portfolio suffer?
   Q2: If it turns out to be a bad day tomorrow,
         what is the worst loss of your investment?

The first is a sensitivity question, and you can give a clear answer after you do a sensitivity measure as we showed in previous lectures.
The second is not a clear question! Before you try to answer it you have to ask back “What do you mean precisely by ‘a bad day’?”, or “How bad the day you suppose it to be? ”