Ch14_ValueatRis(金融工程学,华东师大)k.ppt
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1、Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.1,Value at Risk,Chapter 14,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.2,The Question Being Asked in Value at Ri
2、sk(VaR),“What loss level is such that we are X%confident it will not be exceeded in N business days?”,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.3,Meaning is Probability,(1-)%,%,Z,Options,Futures,and Other Derivatives,4th editi
3、on 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.4,VaR and Regulatory Capital,Regulators require banks to keep capital for market risk equal to the average of VaR estimates for past 60 trading days using X=99 and N=10,times a multiplication factor.(Usually the multiplication fact
4、or equals 3),Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.5,Advantages of VaR,It captures an important aspect of riskin a single numberIt is easy to understandIt asks the simple question:“How bad can things get?”,Options,Futures,
5、and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.6,Daily Volatilities,In option pricing we express volatility as volatility per yearIn VaR calculations we express volatility as volatility per day,Options,Futures,and Other Derivatives,4th edition 200
6、0 by John C.HullTang Yincai,2003,Shanghai Normal University,14.7,Daily Volatility(continued),Strictly speaking we should define sday as the standard deviation of the continuously compounded return in one dayIn practice we assume that it is the standard deviation of the proportional change in one day
7、,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.8,IBM Example(p.343),We have a position worth$10 million in IBM sharesThe volatility of IBM is 2%per day(about 32%per year)We use N=10 and X=99,Options,Futures,and Other Derivatives,4
8、th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.9,IBM Example(continued),The standard deviation of the change in the portfolio in 1 day is$200,000The standard deviation of the change in 10 days is,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang
9、Yincai,2003,Shanghai Normal University,14.10,IBM Example(continued),We assume that the expected change in the value of the portfolio is zero(This is OK for short time periods)We assume that the change in the value of the portfolio is normally distributedSince N(0.01)=-2.33,the VaR is,Options,Futures
10、,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.11,AT&T Example,Consider a position of$5 million in AT&TThe daily volatility of AT&T is 1%(approx 16%per year)The STD per 10 days isThe VaR is,Options,Futures,and Other Derivatives,4th edition 2000 b
11、y John C.HullTang Yincai,2003,Shanghai Normal University,14.12,Portfolio(p.344),Now consider a portfolio consisting of both IBM and AT&TSuppose that the correlation between the returns is 0.7,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal Univer
12、sity,14.13,STD of Portfolio,A standard result in statistics states thatIn this case sx=632,456 and sY=158,114 and r=0.7.The standard deviation of the change in the portfolio value is therefore 751,665,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Norm
13、al University,14.14,VaR for Portfolio,The VaR for the portfolio isThe benefits of diversification are(1,473,621+368,405)-1,751,379=$90,647What is the incremental effect of the AT&T holding on VaR?,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal U
14、niversity,14.15,The Linear Model,We assumeThe change in the value of a portfolio is linearly related to the change in the value of market variablesThe changes in the values of the market variables are normally distributed,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yinc
15、ai,2003,Shanghai Normal University,14.16,The General Linear Model continued(Equation 14.5),Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.17,Handling Interest Rates,We do not want to define every interest rate as a different market
16、 variableAn approach is to use the duration relationship DP=-DPDy so that sP=DPysy,where sy is the volatility of yield changes and sP is as before the standard deviation of the change in the portfolio value,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shangha
17、i Normal University,14.18,Alternative:Cash Flow Mapping(p.347),We choose as market variables zero-coupon bond prices with standard maturities(1mm,3mm,6mm,1yr,2yr,5yr,7yr,10yr,30yr)Suppose that the 5yr rate is 6%and the 7yr rate is 7%and we will receive a cash flow of$10,000 in 6.5 years.The volatili
18、ties per day of the 5yr and 7yr bonds are 0.50%and 0.58%respectively,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.19,Cash Flow Mapping(continued),We interpolate between the 5yr rate of 6%and the 7yr rate of 7%to get a 6.5yr rate
19、of 6.75%The PV of the$10,000 cash flow is,Options,Futures,and Other Derivatives,4th edition 2000 by John C.HullTang Yincai,2003,Shanghai Normal University,14.20,Cash Flow Mapping(continued),We interpolate between the 0.5%volatility for the 5yr bond price and the 0.58%volatility for the 7yr bond pric
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