What is a risk? Risk, in insurance terms, is the eventuality of a loss or other adverse event that has the potential to interfere with an organization's capacity to fulfill its mandate, and for which an insurance claim may be proposed. What is risk management? Risk management makes certain that an organization understands and identifies the risks to which it is exposed. It also guarantees that the organization creates and implements an effective plan to prevent, reduce, or lessen the impact if a loss occurs. A risk management plan includes techniques and strategies for recognizing and confronting these threats. The DV01, also called dollar value of a basis point move, is a measure showing the dollar value of a basis point decrease in interest rates. It shows the change in a bond's price in comparison with a decrease in the bond's yield. This statistic permits us to measure the interest rate risk, which is calculated through the BVP (Basic Point Value). DV01 is an essential value to the BVP establishment. Advantages: This approach permits the clear highlighting of the higher risk level of $50 million 5 year notes paying 10 (7% - 6m libor) + 3% in comparison with a $100 million 30 year Treasury Bonds as well as a $100 million 90 day T-Bills. The notional approach misses this higher risk level.
[...] Risk Management: Evaluation of the risks Table of contents Introduction I. Describe the advantages and disadvantages for each of the following risk measures A. V01 B. Stress testing C. Scenario testing D. Value at risk II. In implementing a VaR model, what considerations would you give to each of the following A. Product complexity B. Liquidity C. Diversity of trading products D. Cost E. Technology III. [...]
[...] Indeed, DV01 is an essential value to the BVP establishment. Advantages This approach permits to clearly highlight the higher risk level of a $50 million 5 year notes paying 10 - 6m libor) + in comparison with a $100 million 30 year Treasury Bonds as well as a $100 million 90 day Bills. In fact, the notional approach misses this higher risk level. The main advantage of the DV01 is that it is easy to understand and that it helps to calculate the BVP. [...]
[...] Indicative Bibliography Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets, The Review of Economics and Statistics 13-39. Damir Wallener, “what is the modern portfolio theory” http://www.wisegeek.com/what-is-modern-portfolio-theory.htm http://www.investordictionary.com E. J. Elton and M. J. [...]
[...] In addition, the Value-at- risk approach with correlation further improved risk measurement. The advantages of value-at-risk include: • Allows measurement of market risk across multiple asset classes (and currencies) to be aggregated into one number. • Captures “portfolio effects” of risk (i.e., correlation effects). • Provides a methodology to set risk limits. • Provides a way of comparing risk across different market sectors and asset classes. • Useful when attempting to measure risk-adjusted returns. Moreover, VAR quantifies, in a single portfolio number, the maximum expected loss in a specified time horizon. [...]
[...] • Useful when attempting to measure risk-adjusted returns. Disadvantages The main negative point in the calculation of VAR is the price volatility of the securities in the portfolio as well as the correlations of those prices. In fact, it fails to take into account the lack of perfect correlation between different instruments. Then, we can underline various limitations of the Value-at-risk approach, the calculation; • Assumes risk factors are normally distributed • Assumes historical variances and correlations are good predictors of future variances and correlations. [...]
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