IDENTIFICATION OF RISK FACTORS

MARKET RISKS
Market Risk

- The risk of fluctuations in portfolio values because of movements in the level or volatility of market prices - Key drivers of risk are FI, equity, commodity risks

- Can be viewed as resulting from exposure and risk factor

MARKET RISKS
a)

Absolute and relative risk

Absolute: Measured in terms of shortfall relative to the initial value of the investment

Relative: Measured relative to a benchmark index and represents active management risk

MARKET RISKS
Cont’d Risk measurements for measuring performance of portfolio managers: Sharpe ratio – measures the ratio of the average rate of return in excess of the risk free rate, to the absolute risk Information ratio – measures the ratio of the average rate of return in excess of the benchmark or the tracking error volatility

MARKET RISKS
b) Directional and Non-directional risk

MARKET RISKS
b) Directional and Non-directional risk

MARKET RISKS
c) Risk Interaction

Example: A trader purchases $1M worth of Philippine Pesos spot from bank A. Current rate is $1/Php 47. Settlement in 10 days Market risk: ???
Credit Risk: ???

Settlement Risk: ???
Operational Risk: ???

II. SOURCES OF LOSS
b) Specific Risk – risk due to issuer specific price movements after accounting for general market factors

III. DISCONTINUITY AND EVENT RISK
a)

Continuous Processes - Brownian motion Jump Process – Discontinuous processes

b)

c)

Event Risk

IV. LIQUIDITY RISK

IV. LIQUIDITY RISK

EXAMPLE: QUESTION

EXAMPLE: ANSWER

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