Market Risk

Topics: Risk, Value at risk, Market risk Pages: 2 (583 words) Published: February 5, 2013
Market Risk
The securities held by banks are divided into two types they are: SLR Securities and Non-SLR Securities. In case of SBH they hold securities like Government securities, Private/Corporate securities, and equities in the form of gold, cash, mutual funds and equity oriented securities like stocks. These securities are subject to the risk of losses in positions arising from movements in market prices called Market Risk. The market risks include: Equity risk, the risk that stock or stock indexes prices and/or their implied volatility will change. Interest rate risk, the risk those interest rates and/or their implied volatility will change. Currency risk, the risk that foreign exchange rates and/or their implied volatility will change. Commodity risk, the risk that commodity prices and/or their implied volatility will change. Traditionally, convention used to measure the potential loss amount due to market risk is to use Value at Risk. The SBH uses its own VAR model known as Fedai-Var model and the risks involving Interest rate risk and Currency risk are majorly taken into consideration, all these are calculated under 99.7% confidence level ( standard deviation = 3.00) in this model. The other important concept to be known while calculating VAR in Market risk is the difference between duration and modified duration of portfolios. Duration is a financial term referring to the cash flow of finances. Examples of these are bonds, stocks and other business shares. Durations are also very important factors in determining yields on prices and other percentages in the field of finance. Duration can be the time expected before the repayment is received or it could also mean the percent of change in price. Duration refers to the weighted average time before repayment or the time when cash flow is received. This duration takes years to measure. Duration can only be extended on instruments with fixed cash flows. Modified Duration is...
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