Risk Measurement And Reporting

Question 1

Advantages of regular risk reporting

Answer 1

Better understanding of risks
Determine appropriate risk and control systems
Assess whether risks are changing over time
Assess the interaction between risks
price,reserve and determine any capital requirements
additional info from credit rating agencies
regulator has understanding of business

Question 2

Ad and disad of using VaR

Answer 2

Ad:
simplicity of expression
intelligibility of its units
Applicability to all types of risks
Applicability over all sources of risk
Facilitating easy comparisons
Disad:
no indication of distribution of losses greater than Var
underestimate asymmetric and fat tails
sensitive to choices of data/parameters

Question 3

Define deterministic model

Answer 3

parameters are fixed at outset
result of running model is single outcome
potential variability assessed by sensitivity analysis
and scenario testing

Question 4

Merits of deterministic model

Answer 4

more readily explainable
concept of variables not easy to understand
easier to understand scenarios
cheaper and easier to design
quicker to run

Question 5

Define stochastic model

Answer 5

at least one parameter is estimated
assigning it to a probability distribution
model run large number of times
with value of stochastic parameters randomly selected
outcome is range of values

Question 6

merits of stochastic model

Answer 6

tests a wider range of scenarios
higher quality of result
more complex run time longer
sensitive to parameters chosen
important to assess financial guarantees