Thursday, October 17, 2019

Value at Risk framework and its utility in Risk Management Assignment

Value at Risk framework and its utility in Risk Management - Assignment Example filed bankruptcy due to failure on their part to manage risk during the financial disaster that occurred in 1990s. If there is not proper management or poor supervision, then billions of dollars may be lost when a financial disaster occurs. VaR is a technique of evaluating risk that employs standard statistical methodologies employed on regular levels in other technical fields. VaR reviews the worst financial loss over a target perspective that will not be surpassed with a given intensity of confidence. Footed on strong scientific groundwork, VaR offers its users with an outline evaluation of risk in market. â€Å"For example, a financial institution might inform that its VaR of its trading assortment on a daily basis is $10 million at the 98% buoyancy or â€Å"confidence level†. This mean, there is only 1 opportunity in a 100, under typical market scenario, for a financial loss higher than $50 million to happen. This single number recapitulates the bank’s vulnerabilit y not only to the prospect of an unfavourable move but also to market risk.† It evaluates the risk employing the analogues' units as the bank’s bottom-line dollars. ... As a result, it is truly a futuristic risk evaluation. VaR is applicable to all financial instruments though in the initial stage, it has been applied only to derivatives. (Jorion 2007: ix) 2- Background Every morning, in J.P Morgan Chase, the global head of Market risk receives a bulk report that summaries the value at risk (VaR) of the bank. JPMorgan Chase's bank’s global risk management system is generating this report during every night. Today, many brokerage firms, many banks, investment funds and even nonfinancial companies employ analogues methods to estimate their financial risk. Securities market regulators, private sector groups and banks have widely acknowledged statistical based risk management strategies like VaR. (Jorion2007:18). Till Guldimann can be said to be the father of the concept VaR while he functioned as the head of global research at J.P Morgan in the late 1980s. J P Morgan’s risk management group had to decide whether fully hedged meant making investment in long-maturity bonds, thus creating a fixed and stable revenues but oscillations in market value or investing in cash thus making the market value as fixed. The J P Morgan bank concluded that â€Å"value risks â€Å"were more significant than â€Å"earning risks† resulting from the invention of VaR. (Jorion2007:18). During that period, there were more concerns in the bank about managing the risk of derivatives. The Group of Thirty (G-30) which had a delegate from J P Morgan offered a way for deliberating best risk management techniques. Through the G-30 report which was published in July 1993, the term VaR term found its way. (Jorion2007:18). On June 26, 1974, the German authorities closed a troubled midsized bank namely

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