FRTB – impact on business strategy

FRTB (or Minimal Capital Requirements for Market Risk, as BCBS would like us to know it now that it’s past the review stage, although I will keep using FRTB) has clearly non trivial impact on how a regulated organization will handle its Market Risk. But the F in...

FRTB – Backtesting and P&L attribution

FRTB Model Validation Framework One of the big areas of change in the FRTB regulations is that the regulators will be far more prescriptive about model validation. What this means is that banks will be required to carry out quite stringent backtesting of the their...

Historical Simulation VaR – Easy Guide

Historical Simulation VaR The Historical Simulation VaR approach is the third approach to value at risk and quite a popular approach in banking institutions along with Monte Carlo. The main point here to remember is that the historical simulation does not make any...

Monte Carlo VaR

Monte Carlo  VaR Given the limitations of the Analytic risk model we can look at other approaches to Value at risk. A very natural approach to consider is using a Monte Carlo VaR Simulation. Monte Carlo simulation will be able to cope with stochastic jumps and...

Value at Risk Models

Market risk as we have already looked at arises from positions that are mismatched. Even brokers who in theory act as middlemen and should not have market risk will end up holding risky positions during the course of trading and market making. A broker may also put on...