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Transcript of Market Risk .
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• Market Risk
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Euro Exchange rate risk
1 One of the advantages of the adoption of a common currency is the reduction of the risk
associated with changes in currency exchange rates. It has been found that the introduction of the euro created "significant
reductions in market risk exposures for nonfinancial firms both in and outside of Europe" These reductions in market risk
"were concentrated in firms domiciled in the eurozone and in non-Euro firms with a high
fraction of foreign sales or assets in Europe".
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Basel II Objective
1 Ensuring that credit risk, operational risk and market risk are quantified
based on data and formal techniques;
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Basel II The accord in operation
1 The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit
risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was
not dealt with at all.
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Basel II The first pillar
1 The first pillar deals with maintenance of regulatory capital
calculated for three major components of risk that a bank
faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this
stage.
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Basel II The first pillar
1 For market risk the preferred approach is VaR (value at risk).
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Basel II November 2005 update
1 On November 15, 2005, the committee released a revised version of the Accord, incorporating changes
to the calculations for market risk and the treatment of double default
effects. These changes had been flagged well in advance, as part of a
paper released in July 2005.
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Basel II July 2006 update
1 On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II
Framework, the elements of the 1988 Accord that were not revised during the Basel II
process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the
November 2005 paper on Basel II: International Convergence of Capital
Measurement and Capital Standards: A Revised Framework
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Basel II January 16, 2009 update
1 For public consultation, a series of proposals to enhance the Basel II
framework was announced by the Basel Committee. It releases a consultative
package that includes: the revisions to the Basel II market risk framework; the
guidelines for computing capital for incremental risk in the trading book; and the proposed enhancements to the Basel
II framework.
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Risk management - Areas of risk management
1 The Basel II framework breaks risks into market risk (price risk), credit risk and operational risk and also specifies methods for calculating capital requirements for each of
these components.
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Risk management - Enterprise risk management
1 In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability
management, liquidity risk, market risk, and operational risk.
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Extreme risk - Bank operational risk
1 Banks need to evaluate the risk of adverse events other than credit risks and market
risks
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Clearing house (finance) - Operation
1 The Central Counterparty does not face any market risk as it has two offsetting positions
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Clearing house (finance) - Comparison
1 However a trader as well as dealing with the market risk needs to assess
the counterparty risk for the counterparty and when trading
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Futures contract - Margin
1 Customer margin Within the futures industry, financial guarantees required of
both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are responsible for
overseeing customer margin accounts. Margins are determined on the basis of
market risk and contract value. Also referred to as performance bond margin.
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Risk - Basic definitions
1 # Securities trading: The probability of a loss or drop in value. Trading risk is divided into two general categories: (1) Systematic risk
affects all securities in the same class and is linked to the overall capital-market system
and therefore cannot be eliminated by diversification. Also called market risk. (2)
Nonsystematic risk is any risk that isn't market-related or is not systemic. Also called
nonmarket risk, extra-market risk, diversifiable risk, or unsystemic risk.
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Risk - Insurance
1 Insurance Risk is often taken by insurance companies, who then bear a pool of risks
including market risk, credit risk, operational risk, interest rate risk, mortality risk, longevity
risks, etc.James M. Carson; Elyas Elyasiani; Iqbal Mansur(December 2008), Market Risk, Interest Rate Risk, and Interdependencies in
Insurer Stock Returns: A System-GARCH Model, The Journal of Risk and Insurance, , 12/2008, Volume 75, Issue 4, pp. 873–891,
doi: 10.1111/j.1539-6975.2008.00289.x
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Finance - Corporate finance
1 In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing
operational, credit and market risks.
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Tobacco - China
1 While this price is guaranteed, it is lower than the natural market price, because of the lack of market risk
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Underwriting - Risk, exclusivity, and reward
1 In summary, the securities issuer gets cash up front, access to the
contacts and sales channels of the underwriter, and is insulated from the market risk of being unable to sell the securities at a good price. The underwriter gets a nice profit from the markup, plus possibly an
exclusive sales agreement.
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Underwriting - Risk, exclusivity, and reward
1 This practice, which is typically justified as the reward for the
underwriter for taking on the market risk, is occasionally criticized as
unethical, such as the allegations that Frank Quattrone acted
improperly in doling out hot initial public offering|IPO stock during the
dot com bubble.
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Economic capital
1 In finance, mainly for financial services firms, 'economic capital' is the amount of risk
capital, assessed on a realistic basis, which a firm requires to cover the risks that it is
running or collecting as a going concern, such as market risk, credit risk, and operational risk. It is the amount of money which is needed to secure survival in a worst case scenario. Firms and financial services regulators should then aim to hold risk capital of an amount equal at
least to economic capital.
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Chief Procurement Officer
1 Globalization, compliance pressures, supply market risk and E-procurement|procurement
automation have simultaneously elevated the visibility of the
procurement discipline within companies and increased supply
management challenges
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Lean Startup
1 Ries' overall claim is that if startups invest their time into iteratively
building products or services to meet the needs of early customers, they
can reduce the market risks and sidestep the need for large amounts
of initial project funding and expensive product launches and
failures.Roush, Wade
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Health economics - Health care markets
1 Features of insurance market risk pools, such as group purchases, preferential selection (cherry-
picking), and preexisting condition exclusions are meant to cope with
adverse selection.
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Arbitrage - Conditions for arbitrage
1 The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before
both transactions are complete
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Arbitrage - Conditions for arbitrage
1 True arbitrage requires that there be no market
risk involved
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Corporate finance - Financial risk management
1 Financial risk management, typically, is focused on the impact on
corporate value due to adverse changes in commodity|commodity
prices, interest rates, exchange rate|foreign exchange rates and stock|
stock prices (market risk)
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Corporate finance - Financial risk management
1 Firstly, firm exposure to business and market risk is a direct result of
previous capital financial investments
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Natural gas storage - Storage development cost
1 The higher expected return from unregulated projects is due to the higher perceived market
risk
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Capital asset pricing model
1 The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or
market risk), often represented by the quantity Beta (finance)|beta (β) in the financial industry, as well as the expected return of the market
and the expected return of a theoretical risk-free interest rate|risk-
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European Banking Authority - Common Reporting Framework
1 It covers credit risk, market risk, operational risk, own fund and capital adequacy ratios
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Investment banks - Risk management
1 Front office market risk activities provide service to investors via derivative solutions, portfolio
management, portfolio consulting, and risk advisory
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Electronic Clearing Service - Operation
1 The Central Counterparty does not face any market risk as it has two offsetting positions
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Electronic Clearing Service - Comparison
1 However a trader as well as dealing with the market risk needs to assess
the counterparty risk for the counterparty and when trading
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Dennis Tito - Life and career
1 Wilshire relies on the field of quantitative analytics, which uses
mathematical tools to analyze market risks - a methodology Tito is credited with helping to develop by applying the same techniques he used to determine a spacecraft's
path at JPL
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Hedge funds - Miscellaneous
1 *Multi-strategy: a hedge fund using a combination of different strategies to reduce
market risk.
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Hedge funds - Risk
1 Managers of hedge funds use particular trading strategies and
instruments with the specific aim of reducing market risks to produce risk-adjusted returns, which are
consistent with investors' desired level of risk
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Margin on Services
1 * a risk-free discount rate is used (unless there is market risk in the projections)
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Build-Operate-Transfer - BOT (build–operate–transfer)
1 *Financing risk: foreign exchange rate risk and interest rate fluctuation,
market risk (change in the price of raw materials), income risk (over-
optimistic cash-flow forecasts), cost overrun risk
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HDFC Bank - Treasury
1 The bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market Debt Securities, and Equities. These services are provided
through the bank's Treasury team. To comply with statutory reserve requirements,
the bank is required to hold 25% of its deposits in government securities. The
Treasury business is responsible for managing the returns and market risk on
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Jim Cramer - Action Alerts charitable trust
1 “If we adjust for his market risk, we come up with an excess return that is essentially zero”, Bolster said, adding
that “zero”, in this case, means his returns are roughly in line with the
risk he’s taking on.
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Operational risk
1 credit risk is exploited by lending institutions to create profit, market risk is exploited by traders and fund
managers, and insurance risk is exploited by insurers)
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Operational risk - Background
1 Since the mid-1990s, the topics of market risk and credit risk have been
the subject of much debate and research, with the result that
financial institutions have made significant progress in the
identification, measurement and management of both these forms of
risk. However, it is worth mentioning that the near collapse of the U.S.
financial system in September 2008 is a clear indication that our ability to measure market and credit risk is far
from perfect.
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Operational risk - Background
1 Events such as the September 11 terrorist attacks, rogue trading losses at Société Générale, Barings, Allied Irish Banks|AIB, UBS and National
Australia Bank serve to highlight the fact that the scope of risk
management extends beyond merely market risk|market and credit risk.
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Operational risk - Difficulties
1 It is relatively straightforward for an organization to set and observe
specific, measurable levels of market risk and credit risk because models exist which attempt to predict the
potential impact of market movements, or changes in the cost
of credit
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Value at risk
1 In financial mathematics and financial risk management, 'value at
risk' ('VaR') is a widely used risk measure of the market risk|risk of
loss on a specific Portfolio (finance)|portfolio of financial assets
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Value at risk - History of VaR
1 Worldwide adoption of the Basel II Accord, beginning in 1999 and
nearing completion today, gave further impetus to the use of VaR.
VaR is the preferred Measure (mathematics)|measure of market
risk, and concepts similar to VaR are used in other parts of the accord.
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Financial statements - Management discussion and analysis
1 MDA typically describes the corporation's Accounting liquidity|liquidity position, capital
resources,[http://www.nikoresources.com/2002manage.html Nico Resources Management's Discussion and
Analysis] results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of
unusual or infrequent nature (such as mergers and acquisitions or share buybacks), positive and negative trends, effects of inflation, domestic and international
market risks,[http://www.pepsico.com/Annual-Reports/1998/financial/analysis.html PepsiCo Management's Discussion and
Analysis] and significant uncertainties.
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Bain Capital - Brookside Capital
1 Brookside Capital is the hedge fund|public equity affiliate of Bain Capital. Established
in October 1996, Brookside's primary objective is to invest in securities of publicly traded companies that offer opportunities to
realize substantial long-term capital appreciation. Brookside employs a
long/short equity strategy to reduce market risk in the
portfolio[http://www.brooksidefund.com Brookside Capital] (company website)
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Financial risk management
1 'Financial risk management' is the practice of creating economic value in a business|firm by using financial instruments to manage exposure to
risk, particularly credit risk and market risk. Other types include
Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it,
and plans to address them.
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Financial risk management - When to use financial risk management
1 This suggests that firm managers likely have many opportunities to
create value for shareholders using financial risk management. The trick
is to determine which risks are cheaper for the firm to manage than the shareholders. A general rule of
thumb, however, is that market risks that result in unique risks for the firm are the best candidates for financial
risk management.https://store.theartofservice.com/the-market-risk-toolkit.html
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Interest rate risk - Interest rate risk at banks
1 The widely deployed CAMELS rating system assesses a financial
institution's: (C)apital adequacy, (A)ssets, (M)anagement Capability,
(E)arnings, (L)iquidity, and (S)ensitivity to market risk
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Professional Risk Managers' International Association
1 * Risk Management Practices (economic capital, regulatory capital,
capital adequacy, operational risk, credit risk, market risk)
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Market risk
1 'Market risk' is the risk of losses in positions arising from movements in market prices.Bank for International
Settlements: A glossary of terms used in payments and settlement
systems [http://www.bis.org/publ/cpss00b.pdf]
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Market risk - Types
1 Some market risks include:
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Market risk - Measuring the potential loss amount due to market risk
1 As with other forms of risk, the potential loss amount due to market risk may be measured in a number of
ways or conventions. Traditionally, one convention is to use value at risk (VaR). The conventions of using VaR are well established and accepted in
the short-term risk management practice.
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Market risk - Use in annual reports of U.S. corporations
1 In the United States, a section on market risk is mandated by the
United States Securities and Exchange Commission|SECFAQ on
the United States [http://www.sec.gov/divisions/corpfin/
guidance/derivfaq.htm SEC Market Disclosure Rules] in all annual reports
submitted on Form 10-K
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TD Securities
1 Key areas of business include managing corporate finance and lending, merger and acquisitions
strategic advisory services, market risk management, debt and equity
securities, derivative products, daily trading and investment, and multiple
other areas of finance
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Bank - Risk and capital
1 * Market risk: risk that the value of a portfolio, either an investment
portfolio or a trading portfolio, will decrease due to the change in value
of the market risk factors.
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BMO Capital Markets
1 'BMO Capital Markets' is investment banking subsidiary of Canadian Bank of Montreal. The
company offers corporate, institutional and government clients access to a range of
financial services. These include equity and debt underwriting, corporate lending and project financing, merger and acquisitions advisory services, securitization, treasury
management, market risk management, debt and equity research and institutional sales
and trading.
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Liquidity risk - Types of liquidity risk
1 'Market liquidity' – An asset cannot be sold due to lack of liquidity in the
market – essentially a sub-set of market risk. This can be accounted
for by:
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Liquidity risk - Causes of liquidity risk
1 If a trading organization has a position in an illiquid asset, its limited
ability to liquidate that position at short notice will compound its market
risk
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Liquidity risk - Causes of liquidity risk
1 It is debatable whether the hedge was effective from a market risk
standpoint, but it was the liquidity crisis caused by staggering margin
calls on the futures that forced Metallgesellschaft to unwind the
positions.
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Tier 1 capital - Tier 1 capital ratio
1 It contains components for Market Risk (typically based on value at risk
(VAR) ) and Operational Risk
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Discounting - Discount rate
1 '3. Equity Market Risk Premium': The return on investment that investors
require above the risk free rate.
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Discounting - Discount rate
1 'Discount rate'= risk free rate + beta*(equity
market risk premium)
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Canadian Imperial Bank of Commerce - Corporate governance
1 * Leslie Rahl (2007) B.Sc., M.B.A.; Founder and Managing Partner,
Capital Market Risk Advisors, Inc.
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Office of the Comptroller of the Currency - Duties and functions
1 By monitoring Capital (economics)|capital, asset quality, management,
earnings, liquidity, sensitivity to market risk, information technology,
consumer compliance, and community reinvestment, the OCC is able to determine whether or not the bank is operating safely and soundly,
and meeting all regulatory requirements
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Internal Ratings-Based Approach (Credit Risk) - Rating System Operations
1 Banks are also required to regularly stress test their rating systems considering economic downturn
scenarios, market risk based events or liquidity conditions that may
increase the level of capital held by the bank. These stress tests should
not only consider the relevant internal data of the bank, but also macro-economic factors that might
affect the accuracy of the rating system.
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Systemic risk - Explanation
1 Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought
or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an
investment by entering into a mirror trade.
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Systemic risk - Diversification
1 Systemic risk, also called market risk or un-diversifiable risk, is a risk of
security (finance)|security that cannot be reduced through
Diversification (finance)|diversification
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Master of Quantitative Finance
1 In general, these degrees aim to prepare students for roles as quants (quantitative analysts), including quantitative analyst|
analysis, Investment_banking#Organizational_structure_
of_an_investment_bank|structuring, trader (finance)|trading, and investment management|
investing; in particular, these degrees emphasize Derivative (finance)|derivatives and fixed income, and the hedge (finance)|hedging and financial risk management|management of the resultant market risk|market and credit risk
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Foreign exchange risk - Value at Risk
1 Banks in Europe have been authorized by the Bank for
International Settlements to employ VAR models of their own design in
establishing capital requirements for given levels of market risk
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Lionel Jospin - Prime Minister
1 A state-supervised reserve fund for old-age insurance was established,
which created marginal capital coverage and was designed to
protect pension levels from financial-market risks
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Investment management - Risk-adjusted performance measurement
1 For example, Fama and French (1993) have highlighted two
important factors that characterize a company's risk in addition to market
risk
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Working capital management - Financial risk management
1 Financial risk management, typically, is focused on the impact on
corporate value due to adverse changes in commodity|commodity
prices, interest rates, exchange rate|foreign exchange rates and stock|
stock prices (market risk)
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Working capital management - Financial risk management
1 Firstly, firm exposure to business and market risk is a direct result of
previous capital financial investments
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Financial risk - Liquidity risk
1 *Asset liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of
market risk. This can be accounted for by:
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Financial risk - Market risk
1 The four standard market risk factors are equity risk, interest rate risk,
currency risk, and commodity risk:
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Futures contract - Margin
1 'Customer margin' Within the futures industry, financial guarantees required of
both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are responsible for
overseeing customer margin accounts. Margins are determined on the basis of
market risk and contract value. Also referred to as performance bond margin.
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Troubled Asset Relief Program - Expenditures and commitments
1 The subsidy cost is defined as, broadly speaking, the difference
between what the Treasury paid for the investments or lent to the firms
and the market value of those transactions, where the assets in
question were valued using procedures similar to those specified
in the Federal Credit Reform Act (FCRA), but adjusting for market risk
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Capital accumulation - Different forms of capital accumulation
1 The propensity to invest in production therefore depends a lot
on expectations of Profit (economics)|profitability and sales
volume, and on perceptions of market risk
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Algorithmic trading - Conditions for arbitrage
1 The long and short transactions should ideally occur simultaneously to minimize the exposure to market
risk, or the risk that prices may change on one market before both
transactions are complete
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Fixed income - Risks
1 * market risk – the risk of market-wide changes affecting the value of the security
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Liquidity - Overview
1 The risk of illiquidity need not apply only to individual investments: whole portfolios are subject to market risk
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High-yield debt - Risk
1 The holder of any debt is subject to interest rate risk and credit risk, inflationary risk, currency risk,
duration risk, Convexity (finance)|convexity risk, repayment of
principal risk, streaming income risk, liquidity risk, default risk, maturity risk, reinvestment risk, market risk,
political risk, and taxation adjustment risk
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Working capital management - Financial risk management
1 Financial risk management, typically, is focused on the impact on
corporate value due to adverse changes in commodity|commodity
prices, interest rates, exchange rate|foreign exchange rates and stock|
stock prices (market risk)
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Working capital management - Financial risk management
1 Firstly, firm exposure to business and market risk is a direct result of
previous capital financial investments
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Money market fund - Explanation
1 Money market funds seek to limit exposure to losses due to credit risk|
credit, market risk|market, and liquidity risk|liquidity risks
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Greenshoe - Greenshoe option
1 The underwriters can do this without the market risk of being long this extra 15% of shares in their own
account, as they are simply covering (closing out) their short position.
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Cost of capital - Cost of equity
1 βsThe sensitivity to market risk for the
security
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Risk model
1 Risk modeling uses a variety of techniques including market risk,
value at risk (VaR), historical simulation (HS), or extreme value theory (EVT) in order to analyze a portfolio and make forecasts of the likely losses that would be incurred for a variety of risks. Such risks are
typically grouped into credit risk, liquidity risk, market risk, and operational risk categories.
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E*TRADE - Subprime portfolio problems
1 The transaction removed the assets with the greatest market risk from E-Trade's consolidated balance sheet—their $3 billion Asset-backed security|
asset-backed securities (ABS) portfolio, including its ABS
collateralized debt obligations (CDOs) and second lien securities
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Diversification (finance) - Maximum diversification
1 Market Risk and Systematic risk are the same thing when the underlying
assets are capital market assets (such as stocks and bonds and
funds). Increased exposure to the classically defined Market therefore
increases market risk, increases systematic risk and decreases
systematic diversification. As such index fund approaches can be very
antagonist to effective diversification.
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Diversification (finance) - Diversifiable and non-diversifiable risk
1 The Capital Asset Pricing Model introduced the concepts of
diversifiable and non-diversifiable risk. Synonyms for diversifiable risk are idiosyncratic risk, unsystematic
risk, and security-specific risk. Synonyms for non-diversifiable risk are systematic risk, beta (finance)|
beta risk and market risk.
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Shadow banking system - Risks or vulnerability
1 From a technical standpoint, these institutions are subject to market
risk, credit risk and especially liquidity risk, since their liabilities are
short term while their assets are more long term and illiquid
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EUR - Exchange rate risk
1 One of the advantages of the adoption of a common currency is the reduction of the risk
associated with changes in currency exchange rates. It has been found that the introduction of the euro created significant
reductions in market risk exposures for nonfinancial firms both in and outside of
Europe. These reductions in market risk were concentrated in firms domiciled in the
eurozone and in non-Euro firms with a high fraction of foreign sales or assets in Europe.
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Reserve Bank of Australia - Payments System Board and the ACCC
1 If members of a payment system are at odds over issues of market risk, admission, safety, and rivalry, the RBA can additionally administer
arbitration with the consent of those involved
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Pharmaceutical industry in the People's Republic of China - Domestic companies
1 In most cases, the agents buy the pharmacy products with cash after weighing the costs and profits, and
the market risks lie with the wholesalers.
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Boomerang Generation - Support
1 Such co-residence can be a valuable form of insurance, particularly for youths from
poorer families.[http://www.minneapolisfed.org/research/wp/wp677.pdf Federal Reserve Bank of Minneapolis, Moving Back Home: Insurance Against Labor Market Risk, March 2010] It may also provide non-negligible income to the parents, though in many cultures, the
young person retains all or nearly all of this income for disposable income purchases.
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National Australia Bank - Financial results
1 These are aimed at servicing the needs of corporate and institutional
customers, which include market risk management (e.g
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Underwriters - Risk, exclusivity, and reward
1 This practice, which is typically justified as the reward for the
underwriter for taking on the market risk, is occasionally criticized as
unethical, such as the allegations that Frank Quattrone acted
improperly in doling out hot initial public offering|IPO stock during the
dot com bubble.
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Value investing - Criticism
1 Some analysts believe that two investors can analyze the same information and reach different
conclusions regarding the intrinsic value of the company, and that there is no systematic or
standard way to value a stock.[http://www.jpmorgan.com/tss/General/Investment_Style/1159369368373] In other words, a value investing strategy can only be considered
successful if it delivers excess returns after allowing for the risk involved, where risk may be defined in many different ways, including market
risk, multi-factor models or idiosyncratic risk.
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Bought deal
1 #The issuer/client may only be willing to do a deal if it is bought (as
it eliminates execution or market risk.)
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Short (finance) - History
1 A few years later, in 1949, Alfred Winslow Jones founded a fund (that
was unregulated) that bought stocks while selling other stocks short,
hence hedging some of the market risk, and the hedge fund was born.
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Proprietary trading - Arbitrage
1 The trade will remain subject to various non-market risks, such as
settlement risk and other operational risks
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Security market line - Formula
1 The Y-intercept of the SML is equal to the risk-free interest rate. The slope
of the SML is equal to the market risk premium and reflects the risk return
trade off at a given time:
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Day trading - Financial settlement
1 But today, to reduce market risk, the settlement period is typically three working
days
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Pairs trade - Drift and risk management
1 *In ‘market-neutral’ strategies, you are assuming that the CAPM model is
valid and that beta is a correct estimate of systematic risk—if this is
not the case, your hedge may not properly protect you in the event of a shift in the markets. Note there are other theories on how to estimate market risk—such as the Fama-
French Factors.https://store.theartofservice.com/the-market-risk-toolkit.html
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Pairs trade - Drift and risk management
1 *Measures of market risk, such as Beta coefficient|beta, are historical and could be very different in the future than they have been in the
past.
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Cultivation of tobacco - China
1 While this price is guaranteed, it's lower than the natural market price because of the lack of market risk
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Ulcer Index
1 The 'ulcer index' is a stock market risk measure or technical analysis indicator
devised by Peter Martin in 1987,[http://www.tangotools.com/ui/ui.htm
Peter Martin's Ulcer Index page] and published by him and Byron McCann in their
1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of
volatility, but only volatility in the downward direction, i.e. the amount of drawdown or
retracement occurring over a period.
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Alfred Winslow Jones - The birth and development of the hedge fund concept
1 He used Leverage (finance)|leverage to buy more shares, and used Short
(finance)|short selling to avoid market risk
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Treynor ratio
1 The 'Treynor ratio' (sometimes called the 'reward-to-volatility ratio' or 'Treynor measure'), named after Jack L. Treynor, is a measurement of the returns earned in excess of that which could have been earned on an investment that has no diversifiable risk (e.g., United States
Treasury security#Treasury bill|Treasury bills or a completely diversified portfolio),
per each unit of market risk assumed.
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Liquid asset - Overview
1 The risk of illiquidity need not apply only to individual investments: whole portfolios are subject to market risk
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Long/short equity - Overview
1 A fund manager typically attempts to reduce volatility (finance)|volatility by either
diversifying or hedging positions across individual regions, industries, sectors and market capitalization bands and hedging
against un-diversifiable risk such as market risk. In addition to being required of the portfolio as a whole, neutrality may in
addition be required for individual regions, industries, sectors, and market capitalization
bands.
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Long/short equity - Market neutral strategies
1 Market neutrality refers to hedging out market risk, which can be managed through the use of
derivatives, such as futures on market indexes. Market neutral funds usually seek to hedge against most
or all predictable risk exposures.
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Equity market neutral
1 An investment strategy or Portfolio (finance)|portfolio is
considered 'market-neutral' if it seeks to avoid some form of market
risk entirely, typically by hedge (finance)|hedging. In order to
evaluate market-neutrality, it is necessary to specify the risk being avoided. For example, convertible arbitrage attempts to fully hedge
fluctuations in the price of the underlying common stock.
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Government Accountability Project - Eric Ben-Artzi
1 Ben-Artzi joined Deutsche Bank in 2010 as a quantitative risk analyst in
the company's Market Risk Management department
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Bridgewater Associates - Separation of Alpha and Beta
1 The company divides its investments into two basic categories: 1) Beta (finance)|Beta investments, whose
returns are generated through passive management and standard market risk, and 2) Alpha (finance)|Alpha investments, whose goal is to
generate higher returns that are uncorrelated to the general market
and are actively managedhttps://store.theartofservice.com/the-market-risk-toolkit.html
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Risk (magazine)
1 It includes papers on Option (finance)|option pricing and hedging,
market risk, credit risk, Swap (finance)|swaps and Monte Carlo
methods
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Specific risk
1 In a balanced portfolio of assets there'd be a spread between general
market risk and risks specific to individual components of that
portfolio
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Specific risk
1 Unlike systematic risk or market risk, specific risk can be diversified
away.In fact, most unsystematic risk is removed by holding a portfolio of
about twenty-five to thirty securities.
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130/30
1 'Portable alpha' is the return of an investment portfolio with zero market risk
(Beta (finance)|beta). Being independent of both the direction and the magnitude of the
market's movements, it represents the manager's skill in selecting investments.
Elimination of the market risk can be accomplished by means of short selling and
derivatives such as Futures contract|futures, swaps, and option (finance)|
options. https://store.theartofservice.com/the-market-risk-toolkit.html
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130/30 - Example of Portable Alpha
1 Based on his beta (market risk), his portfolio should have returned 8.5% less than the risk free asset, but his skill in picking market capitalization|
small-cap stocks resulted in his portfolio only declining 5% below the
risk-free rate
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130/30 - Usage of a Portable Alpha manager
1 Because market risk is eliminated, an investor might be convinced to invest
in asset classes that he may not otherwise wish to invest in, as long
as the investor has confidence in the skill of the investment manager
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Hedge accounting - Why is hedge accounting necessary?
1 All entities are exposed to some form of market risk. For example, gold mines are exposed to the price of
gold, airlines to the price of jet fuel, borrowers to interest rates, and
importers and exporters to exchange
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Risk adjusted return on capital - Basic formula
1 Economic capital is a function of market risk, credit risk, and operational risk, and is often
calculated by VaR
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Covered warrant - Risks
1 The main exposure is to market risk as the warrant will be profitable only when the market price exceeds the strike price for a call warrant or is below the strike for a put warrant
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Basel II Accord - Objective
1 # Ensuring that credit risk, operational risk and market risk are quantified based on data and formal
techniques;
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Basel II Accord - July 2006 update
1 On July 4, 2006, the committee released a comprehensive version of the Accord, incorporating the June 2004 Basel II
Framework, the elements of the 1988 Accord that were not revised during the Basel II
process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the
November 2005 paper on Basel II: International Convergence of Capital
Measurement and Capital Standards: A Revised Framework
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Basel II Accord - January 16, 2009 update
1 For public consultation, a series of proposals to enhance the Basel II framework was announced
by the Basel Committee. It releases a consultative package that includes: the
revisions to the Basel II market risk framework; the guidelines for computing capital for
incremental risk in the trading book; and the proposed enhancements to the Basel II
framework.[http://www.bis.org/publ/bcbs148.pdf?noframes=1 Revisions to the Basel II market
risk framework]
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News analytics - Financial Risk Management
1 The objective of financial risk management is to create economic
value in a firm or to maintain a certain risk profile of an investment
portfolio by using financial instruments to manage risk
exposures, particularly credit risk and market risk
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Bond convexity - Application of convexity
1 #Convexity is a risk management figure, used similarly to the way Gamma (finance)|'gamma' is used in derivatives risks management; it is a
number used to manage the market risk a bond portfolio is exposed to. If the combined convexity and duration of a trading book is
high, so is the risk. However, if the combined convexity and duration are low, the book is
hedge (finance)|hedged, and little money will be lost even if fairly substantial interest
movements occur. (Parallel in the yield curve.)
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Cox–Ingersoll–Ross model
1 In mathematical finance, the 'Coxndash;Ingersollndash;Ross model' (or 'CIR
model') describes the evolution of interest rates. It is a type of one factor model (short rate model) as it describes interest rate movements as driven by only one source of market risk. The model can be used in the valuation of interest rate derivatives. It was introduced in 1985 by John C. Cox, Jonathan E. Ingersoll and Stephen
Ross (economist)|Stephen A. Ross as an extension of the Vasicek model.
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Cox–Ingersoll–Ross model - The model
1 where W_t is a Wiener process (modelling the random market risk factor) and a , b , and \sigma\, are the parameters. The parameter a corresponds to the speed of adjustment, b to the mean and \sigma\, to volatility. The
drift factor, a(b-r_t), is exactly the same as in the Vasicek model. It ensures mean reversion (finance)|mean reversion of the interest rate towards the long run value b, with speed of adjustment governed by the strictly positive
parameter a.
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Harry Markowitz - Choosing the best Portfolio
1 (RM - IRF)/σM is the slope of CML. (RM - IRF) is a measure of the risk premium, or the reward for holding risky portfolio instead of risk-free
portfolio. σM is the risk of the market portfolio. Therefore, the slope
measures the reward per unit of market risk.
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Form 10-K - Parts
1 ITEM 7A. Quantitative and
Qualitative Disclosures About
Market Riskhttps://store.theartofservice.com/the-market-risk-toolkit.html
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Conditional Value-at-Risk
1 'Expected shortfall (ES)' is a risk measure, a concept used in finance (and
more specifically in the field of financial risk measurement) to evaluate the market risk
or credit risk of a portfolio. It is an alternative to value at risk that is more
sensitive to the shape of the loss distribution in the tail of the distribution. The expected shortfall at q% level is the
expected return on the portfolio in the worst q% of the cases.
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Technical change
1 From a capital finance point of view, advances in technology are the
classic definition of systemic market risk
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Vasicek model
1 It is a type of one-factor model (more precisely, one factor short rate
model) as it describes interest rate movements as driven by only one
source of market risk
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Vasicek model - Details
1 where Wt is a Wiener process under the risk neutral framework modelling
the random market risk factor, in that it models the continuous inflow
of randomness into the system
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Solar Renewable Energy Certificates - Spot sales
1 Spot price for SRECs are generally higher than prices found in long-term contracts since the system owner is
taking on market risk
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Interest rate swap - Risks
1 *Market Risk: A typical swap consists of two legs, one fixed, the other floating. The risks of
these two component will naturally differ. Newcomers to market finance may think that the risky component is the floating leg, since the underlying interest rate floats, and hence,
is unknown. This first impression is wrong. The risky component is in fact the fixed leg
and it is very easy to see why this is so.http://chicagofed.org/webpages/publicatio
ns/understanding_derivatives/index.cfm
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Discounted - Discount rate
1 : 'Discount rate' = (risk free rate) + beta * (equity market risk
premium)
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Trading room - Risk-management
1 Deal capture of transactions by traders, position-keeping, measure of
market risks (interest-rates and foreign exchange), calculation of
Profit Loss (PL), per desk or trader, control of limits set per counterparty, are the main functionalities delivered
by these systems.
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Social Security reform - Rate of return and individual initiative
1 Debate has ensued over the advisability of subjecting workers' retirement money to
market risks.
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Repurchase agreement - Uses
1 The concept of a matched-book trade follows closely to that of a
broker who takes both sides of an active trade, essentially having no
market risk, only credit risk
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Credit-linked note - Emerging Market CLN
1 From a market risk perspective owning a CLN is almost identical to owning the local debt
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Chen model
1 In finance, the 'Chen model' is a mathematical model describing the evolution of interest rates.
It is a type of three-factor model (short rate model) as it describes interest rate movements as driven by three sources of market risk. It was
the first stochastic mean and stochastic volatility model and it was published in 1994 by
economist Lin Chen, a Harvard doctorate, former US Federal Reserve Board economist,
and professor of Yonsei University of Korea and Nanyang Tech University of Singapore.
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Bank Mandiri
1 It also has Capital Adequacy Ratio (CAR) of 16,08% (including market
risk), Return on Asset (RoA) of 3.45%, and Return on Equity (RoE) of
22.18%
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Health savings account - Criticism
1 HSA funds that are not held in savings accounts insured by the
Federal Deposit Insurance Corporation are subject to market risk, as is any other investment. While the potential upside from
investment gains can be viewed as a benefit, the subsequent downside, as well as the possibility of capital loss, may make the HSA a poor option for
some.https://store.theartofservice.com/the-market-risk-toolkit.html
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Paris Dauphine University - Master programs
1 The Financial Engineering and Quantitative Economics Programme 272 prepares students to topics such
as the techniques of quantitative finance, corporate finance, asset
management and market risk management. For this, the
curriculum combines the teaching of financial theory and its application in business while training students for computational methods in finance.
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Charles Davis Tillman - Life’s Railway to Heaven
1 together with a tune attributed to himself, in an age when being in any way associated with Mormon lyrics
would have been fraught with market risk for Tillman
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History of the British Raj - Effects on the economy
1 However, unlike Britain itself, where the market risks for the
infrastructure development were borne by private investors, in India, it
was the taxpayersmdash;primarily farmers and farm-
labourersmdash;who endured the risks, which, in the end, amounted to
£50 million
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Jaws (franchise) - Box office
1 This was attractive to studios because it reduced market risk
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Ex-Im Bank - Criticism
1 Using a fair-value estimate, which incorporates market risk, finds “This simple approach – which is based on
a method outlined in a National Bureau of Economic Research paper
by Debbie Lucas of the Massachusetts Institute of
Technology – suggests that the Ex-Im bank’s long-term loan guarantee
program actually provides guarantees at a loss for taxpayers,
not a profit
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Marcel Rohner (banker) - Biography
1 Between 1993 and 1998, Rohner was with Swiss Bank Corporation’s
Investment Banking branch, where in 1995 he was appointed Head of
Market Risk Control Europe.
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Marcel Rohner (banker) - Biography
1 In 1998, he worked as Head of Market Risk Control of Warburg Dillon Read. In 1999, he was promoted to
Group Chief Risk Officer.
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Basel 4 - History
1 The Basel Committee on Banking Supervision released a consultative
paper, seeking out views on the Committee's plan to change how capital requirements and market
risks are calculated.
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