Chapter 5: Market Risk Flashcards
What is Volatility risk
The risk of price movement that are more uncertain than usual affecting the pricing of products. Has the biggest affect on options market
What is Market liquidity risk
The risk of loss through not being able o trade in a market or obtain a price on a desired product when required
What is Currency risk
The risk that adverse movements in exchange rates drastically affect the value of a portfolio or instrument
What is basis risk
This is the risk that, when hedging a position, the two instruments are not equal and opposite, but in fact behave in a similar manner
What is interest rate risk
the risk that adverse movements in interest rates will directly affect fixed-income securities, futures, options and forwards
What is commodity price risk
The risk of adverse price movements in the value of a commodity
What is Equity price risk
The risk that the share price decreases or fails to rise in line with inflation. Also includes the risk that dividends may decrease or not be paid at all
What are boundary issues
When multiple types of risk overlap/cause/affect one another
What are market risk limits
A ‘stop-loss’ and may be expressed in terms of VaR or as an absolute number
What do the market risk function do
Ownership of market risk management policy
Proactive management of market risk issues
Define escalation procedures
Validate Pricing and VaR models
Daily monitoring of risk utilization
What is the central tendency
A typical value taken from market datasets that captures the ‘essence’ of the distribution
What is the dispersion
How far values stray from the typical value
What are the measures of central tendency
Mean
Median
Mode
What are the measures of dispersion
Range
Quartile deviation
Variance
Standard Deviation
What is quartile deviation
A measure of dispersion through the middle half f the distribution