New Market Risk Regulations – Trading Book

In the last post I looked at the new overall market risk regulation, and its split into Trading Book (TB) and CVA. In this note I will focus on FRTB-TB. The major changes that FRTB-TB brings can be summarized as: Much stronger and prescriptive separation of trading...

Risk Factor Mapping

Mapping a Position to a Risk factor So far we have assumed that each position in a portfolio is matched directly to an underlying risk factor (see Analytical VaR post). However in practice this may not be feasible or even desirable. The market practice is to map each...

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...

Analytical VaR

This method is used mainly for linear products – spot and futures products. Linear VAR cannot be used to quantify the risk of derivatives as the model cannot take into account higher order risks such as gamma and vega. This method is also referred to as the...

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...