abhishreshthaa
Abhijeet S
JP Morgan Risk Metrics Model
Idea is to determine the daily earnings at risk = dollar value of position × price sensitivity × potential adverse move in yield
Example of 7-year zero-coupon bonds
Price volatility = (-MD) (Potential adverse change in yield)
= (-6.527) (0.00165) = -1.077%
MD = D/(1+R)
If the standard deviation is 10 basis points, this corresponds to 16.5 basis points. Concern is that yields will rise. Probability of yield increases greater than 16.5 basis points is 5%.
DEAR = Market value of position (Price volatility)
= ($1,000,000) (.01077) = $10,770
Eg:
To calculate the potential loss for more than one day:
Market value at risk (VAR) = DEAR × N
Example:
For a five-day period,
VAR = $10,770 × 5 = $24,082
Idea is to determine the daily earnings at risk = dollar value of position × price sensitivity × potential adverse move in yield
Example of 7-year zero-coupon bonds
Price volatility = (-MD) (Potential adverse change in yield)
= (-6.527) (0.00165) = -1.077%
MD = D/(1+R)
If the standard deviation is 10 basis points, this corresponds to 16.5 basis points. Concern is that yields will rise. Probability of yield increases greater than 16.5 basis points is 5%.
DEAR = Market value of position (Price volatility)
= ($1,000,000) (.01077) = $10,770
Eg:
To calculate the potential loss for more than one day:
Market value at risk (VAR) = DEAR × N
Example:
For a five-day period,
VAR = $10,770 × 5 = $24,082