Preview

credit risk management

Good Essays
Open Document
Open Document
1605 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
credit risk management
a. Discuss the need for and uses of credit VaR models. b. Explain the main differences between DM and MTM models. c. What are the features of the main credit VaR models used in practice and how do they differ to each other?

a) Value at Risk – I don’t think you have addressed the question by discussing about the need and uses of the model. Why people should choose VaR model (ROLES, USAGE, ADVANTAGE) and not how should they calculate. The discussion below is more towards the introduction of VAR and how to use the model. I think the compositions of the VaR should be discussed in question 3, as it talks about the features and the uses in practice. http://people.stern.nyu.edu/adamodar/pdfiles/papers/VAR.pdf OR http://ferrari.dmat.fct.unl.pt/personal/mle/GestaoRisco/AcordoBasileia/CredRiskMod.pdf Try looking at these websites.
-(EXAMPLE FOR Q1) value at risk (VaR) methods used in allocating economic capital against market risks. Specifically, the economic capital for credit risk is determined so that the estimated probability of unexpected credit loss exhausting economic capital is less than some target insolvency rate.
Capital allocation systems generally assume that it is the role of reserving policies to cover expected credit losses, while it is that of economic capital to cover unexpected credit losses. Thus, required economic capital is the additional amount of capital necessary to achieve the target insolvency rate, over and above that needed for coverage of expected losses.

Value at Risk (VaR) is used to measure the potential loss in the value of a risky portfolio over a defined period for a given confidence interval. With BIS 1998 in place, certain banks developed credit value-at-risk models under two main categories during the late 1990s. The first type of credit VaR models is the default mode models (DM) in which the credit risk is linked to the default risk.

a)
Value-at-risk (VaR) methods used in allocating economic capital

You May Also Find These Documents Helpful

  • Good Essays

    Energy Trading Assignment

    • 670 Words
    • 3 Pages

    Value at risk is the expected loss for an adverse market movement in a specified probability (e.g. 95%) over a particular period of time (e.g. a day).…

    • 670 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Ethics Paper Final BU486

    • 1953 Words
    • 6 Pages

    Ironically, it was actually JP Morgan who pioneered the most prevalent risk management tool on Wall Street. Value at Risk (VAR) measures the risk of loss on a specific portfolio of financial assets. For example,…

    • 1953 Words
    • 6 Pages
    Better Essays
  • Good Essays

    Risk assessment and risk management are regarded as key activities during preparation, critical reviews and implementation of a major application system like a VAT system. The risks that may impede the implementation covers a much broader spectrum than that of the information system itself as depicted below.…

    • 740 Words
    • 3 Pages
    Good Essays
  • Better Essays

    The paper focused on understanding the role of using standard deviation in estimating the risks involved in investments. According to Scott (2006), historically few, if any, real world investors naturally think in terms of standard deviations when they think about risk. The traditional risk models did not take into account standard deviation. In this paper, the author has evaluated the impact of using standard deviation in enhancing risk management strategies.…

    • 1729 Words
    • 6 Pages
    Better Essays
  • Good Essays

    2. Please review the following article in 200-250 words: Altman, E. I., and A. Saunders, (1998) ‘Credit risk measurement: Developments over the last 20 years’, Journal of Banking and Finance, Vol.21, pp.1721-1742.…

    • 523 Words
    • 3 Pages
    Good Essays
  • Best Essays

    Financial Crisis Inquiry Commission. 2010. “Credit Ratings And the Financial Crisis.” Pre- liminary Staff Report, June 2, 2010…

    • 2004 Words
    • 9 Pages
    Best Essays
  • Powerful Essays

    Bank6003 Notes

    • 6266 Words
    • 26 Pages

    * Quantitative models that use data on observed borrower characteristics to calculate a score that represents borrower’s probability of default or sort borrowers into different default risk categories.…

    • 6266 Words
    • 26 Pages
    Powerful Essays
  • Powerful Essays

    1. Describe five reasons why market risk measurement is important 2. List the models being used to calculate market risk exposure…

    • 11419 Words
    • 46 Pages
    Powerful Essays
  • Powerful Essays

    ITCM Crisis

    • 6760 Words
    • 28 Pages

    detection scope of the VaR models used by LTCM (Davis, 1999). Russia defaulted on its debt,…

    • 6760 Words
    • 28 Pages
    Powerful Essays
  • Satisfactory Essays

    Resume 2011

    • 342 Words
    • 2 Pages

    March 2010- November 2010: Operational Risk Manager at BNP Paribas – CIB – Structured Finance…

    • 342 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Abstract This paper develops an effective value at risk (VaR) methodology to complement existing Bank of Jamaica financial stability assessment tools. This methodology employs principal component analysis and key rate durations for assessing interest rate risk of the Jamaican banking sectors’ holdings of both local and global Government of Jamaica (GOJ) bonds. Principal Components Analysis (PCA) is proposed as a tractable and simple-to-implement method for extracting market risk factors from observed data. This approach, which is informationally efficient, quantifies the risk associated with portfolios using three principal factors that affect yield curves. Due to the orthogonal nature of the factors, correlation and covariance between the yields do not have to be explored, simplifying the calculation of VaR for the portfolios. Results of this paper indicate that the PC VaR outturn for the Jamaican banking system is higher relative to both parametric and historical VaR outturns suggesting that the PC VaR holds more information as it relates to the risks impacting banking system portfolios.…

    • 7587 Words
    • 31 Pages
    Powerful Essays
  • Powerful Essays

    Value at Risk

    • 4802 Words
    • 20 Pages

    Value at risk is a statistical technique which measures the level of financial risk in a portfolio over a specific time frame. For example, if a firm states that it has a 1% one week value at risk of $5 million; this would mean that for any given week, the firm would have a 1% chance of losing $5 million. In order words, 1 out of every 100 weeks, the firm would expect to have a loss of $5 million. This can be viewed as the standard deviation of portfolio value during “normal” market movements. The reason we look at it in terms of losses even though VaR compromises of some risk metric like volatility is because VaR is a type of risk measurement and the calculation of VaR would determine the amount of risk one’s portfolio is exposed to at a given time frame.…

    • 4802 Words
    • 20 Pages
    Powerful Essays
  • Powerful Essays

    Value at Risk

    • 1351 Words
    • 6 Pages

    Initially, the VaR has been anticipating to quantify the available risks in derivatives markets, but it has grown widely and it has now been applied in measuring all kinds of risks, primarily credit and market risks. It also developed from a tool that quantifies risk to a tool that is applied in active risk management. Today VaR has shifted beyond application in financial institutions. In the beginning, companies with largely exposed to financial markets used other kinds of activities before spreading to other businesses. Today, an ever-growing numbers of individual businesses apply and appreciate VaR as an effective tool for quantifying financial risksKrause (2003). This trend is evidently aided by the fact that non-specialists easily understand VaR. The risks of the prevalent use of VaR are an overdependence on the results it gives, misconception, and even abuse. It is as a result that, essential individuals using VaR understand its problems and limitations. In this paper, I will explore in depth these constraints, which unluckily do not mark prominently.…

    • 1351 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    used to manage the most important dimension of financial risk - credit risk. In addition to the standard…

    • 6661 Words
    • 27 Pages
    Powerful Essays
  • Satisfactory Essays

    HW1 2015

    • 422 Words
    • 2 Pages

    5. Suppose the true loss is heavy-tailed, while we calculate Value-at-Risk (VaR) by assuming it…

    • 422 Words
    • 2 Pages
    Satisfactory Essays