Mastering Value Risk: A Step-by-step Guide To Understanding & Applying Var

by Cormac. Butler

May 10, 1999 | Trade Paperback

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  The estimation of potential losses that could arise from adverse changes in market conditions is a key element of risk management.  For financial institutions and corporate treasuries across the world, Value at Risk (VaR) is rapidly emerging as the dominant methodology for estimating precisely how much money is at risk each day in the financial markets. However, the communication and application of VaR is a field in which the signal to noise ratio is not high.  there is neither a widespread intuitive understanding of VaR in the market, nor an appreciation of the practicalities of its implementation and limitations. Mastering Value at Risk will close that knowledge gap, introducing this potentially powerful methodology to those most in need of its benefits, and helping all those who encounter VaR to use it wisely.

Format: Trade Paperback

Dimensions: 256 pages, 8.9 × 6.8 × 0.9 in

Published: May 10, 1999

Language: English

The following ISBNs are associated with this title:

ISBN - 10: 0273637525

ISBN - 13: 9780273637523

Found in: Financial, Investing, Investments and Securities

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– More About This Product –

Mastering Value Risk: A Step-by-step Guide To Understanding & Applying Var

by Cormac. Butler

Format: Trade Paperback

Dimensions: 256 pages, 8.9 × 6.8 × 0.9 in

Published: May 10, 1999

Language: English

The following ISBNs are associated with this title:

ISBN - 10: 0273637525

ISBN - 13: 9780273637523

Read from the Book

Preface There is little doubt that, over the past four years, the profession of Financial Risk Management has grown considerably. Banks have set up specialist risk divisions whose function is not only to measure risk, but also to control it. Value at Risk has an important role to play here. Those who have a sound grasp of its principles, and who understand the unique nature of derivative risk, are in a better position not only to trade properly, but also to avoid contributing to the huge losses that many major banks have suffered in the last few years. Value at Risk is not only of interest to risk practitioners, but also to traders who want to trade profitably and, of course, to graduate and post-graduate students who want to become derivative traders, or who want to specialize in risk management. Recently, the Futures and Options Association has recommended that directors of major banks become actively involved in policies of risk management, rather than to delegate them, which is the current practice of many banks. A good grasp of VaR is, therefore, essential for this sector as well. Mastering VaR is designed for the practitioner. Today, most practitioners recognize the importance of an interactive book, which encourages active as opposed to passive learning. Mastering VaR uses Excel spreadsheets to achieve this. If you have Excel available, you will be guided toward setting up a simple but illustrative VaR system. If you do not have Excel, the examples are designed so that
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Table of Contents

Preface. Acknowledgments. 1. An Outline of Value at Risk. Introduction. What is Value at Risk? Volatility and how to exploit it profitably. Correlation—its role in risk reduction. Conclusion. 2. Value at Risk as a Tool in Supervisory Regulation. Regulation: what it is and why it''s necessary. Capital adequacy and the Basle Accord—what it is trying to achieve. Should regulators recognize diversification? Conclusion. 3. Portfolio Risk Measurement. A profile of VaR methods. How matrices are used to calculate VaR. Comparison of the variance covariance approach with other methods, or which VaR method is best? Variance covariance with a three-asset portfolio. Constructing the weighting matrix. Mapping. Appendix 3.1. Appendix 3.2. 4. Fixed Income Products. The range of fixed income products. Interest rate conventions. VaR on forward rate agreements. How swaps work. Conclusion. 5. Measuring the Risk of Complex Derivative Products. Interest rate sensitivity. Calculating duration and convexity. The unique risk characteristics of convexity. The role of delta gamma in VaR measurement. Conclusion. Appendix 5.1. 6. The Greeks. The risk sensitivities of options. Reducing the risk of option portfolios. Exploiting volatility smiles profitably. Conclusion. 7. OptionStrategies. Which option strategies work? Volatility trading: straddles, strangles, butterflies, and ratio spreads. Time spread strategies. Conclusion. 8. Monte Carlo Simulati
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From the Publisher

  The estimation of potential losses that could arise from adverse changes in market conditions is a key element of risk management.  For financial institutions and corporate treasuries across the world, Value at Risk (VaR) is rapidly emerging as the dominant methodology for estimating precisely how much money is at risk each day in the financial markets. However, the communication and application of VaR is a field in which the signal to noise ratio is not high.  there is neither a widespread intuitive understanding of VaR in the market, nor an appreciation of the practicalities of its implementation and limitations. Mastering Value at Risk will close that knowledge gap, introducing this potentially powerful methodology to those most in need of its benefits, and helping all those who encounter VaR to use it wisely.

From the Jacket

“This book provides a solid foundation for an understanding of Value at Risk from both an internal and a regulatory perspective, which should be invaluable as both an initial read and also as a continuing source of reference. Keep this by your side as a roadmap through the jungle of competing models, mathematical formulae and erudite statistics.”

- Dr Richard Flavell, Director, Lombard Risk Systems

 

“Cormac Butler has the distinct advantage of being a trainer in the subject, which is definitely the best assurance that he is fully up-to-speed in this complex and constantly changing field.”

- Dr D C Gardner, Chairman, Birchin International plc

 

The estimation of potential losses that could arise from adverse changes in market conditions is a key element of risk management.  For financial institutions and corporate treasuries across the world, Value at Risk (VaR) is rapidly emerging as the dominant methodology for estimating precisely how much money is at risk each day in the financial markets.

 

However, the communication and application of VaR is a field in which the signal to noise ratio is not high.  There is neither a widespread intuitive understanding of VaR in the market, nor an appreciation of the practicalities of its implementation and limitations.

 

Mastering Value at Risk will close that knowledge gap, introducing this potentially powerful methodology to those most in need of its benefits, and helping all those who encounter VaR to use it wisely.

 

Key topics examined include:

  • A practical introduction to Value at Risk
  • Value at Risk as a Tool in Supervisory Regulation
  • A profile of VaR methods, how matrices are used to calculate VaR and a comparison of the variance covariance approach with other methods
  • VaR on forward rate agreements
  • The risk sensitivities of options
  • Applying VaR principles to Credit Control

From the Author

Preface There is little doubt that, over the past four years, the profession of Financial Risk Management has grown considerably. Banks have set up specialist risk divisions whose function is not only to measure risk, but also to control it. Value at Risk has an important role to play here. Those who have a sound grasp of its principles, and who understand the unique nature of derivative risk, are in a better position not only to trade properly, but also to avoid contributing to the huge losses that many major banks have suffered in the last few years. Value at Risk is not only of interest to risk practitioners, but also to traders who want to trade profitably and, of course, to graduate and postgraduate students who want to become derivative traders, or who want to specialize in risk management. Recently, the Futures and Options Association has recommended that directors of major banks become actively involved in policies of risk management, rather than to delegate them, which is the current practice of many banks. A good grasp of VaR is, therefore, essential for this sector as well. Mastering VaR is designed for the practitioner. Today, most practitioners recognize the importance of an interactive book, which encourages active as opposed to passive learning. Mastering VaR uses Excel spreadsheets to achieve this. If you have Excel available, you will be guided toward setting up a simple but illustrative VaR system. If you do not have Excel, the examples are designed so that
read more read less
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