| Cooking with Basel II: Market Risk |
| Basel II Recipes: Standard Framework for Measuring Market Risk |
Now that we have the ingredients listed (those of you who struggled
with the last page), we come to the recipes to create our culinary
masterpiece.
with the last page), we come to the recipes to create our culinary
masterpiece.
| Measuring Market Risks |
Now that we have a handle on the trading book and the valuations
of positions, foreign exchange and commodities dealings, it is time
to figure out the risk and capital requirements.
There are two general methods:
of positions, foreign exchange and commodities dealings, it is time
to figure out the risk and capital requirements.
There are two general methods:
- the Standard Framework; AND
- the Internal Models Approach.
| Standard Framework |
This Standard Framework uses "building blocks" of specific risk and
general market risk.
general market risk.
General market risk is the risk associated with loss due to changing
market rates. Two principal methods of calculation are
market rates. Two principal methods of calculation are
- the Maturity Method; OR
- the Duration Method.
Specific risk
- the risk an individual debt or equity security moves in excess or
shortage of the general market; AND - Event risk (precipitous movement of an individual security
relative to the general market).
Finally, for the Standard Framework, we get to the individual risk measures.
This table summarizes (I apologize for shifting to a summary as I know all
readers are glued to their browsers here):
The capital requirement determined by the Standard Framework is typically
a percentage of the market valuations determined by the above
summarized algorithm details.
This table summarizes (I apologize for shifting to a summary as I know all
readers are glued to their browsers here):
The capital requirement determined by the Standard Framework is typically
a percentage of the market valuations determined by the above
summarized algorithm details.
|
 | |  | |  | |  |