Risk measures for different assets

Bondholm's picture
Rank: Orangutan | banana points 313

Hi guys. I have a quick question regarding the best/appropriate risk measures for different types of assets.

Equities - standard deviation, beta, VaR;
Bonds - duration, convexity, DV01, VaR;
Options - greeks;
FX/Commodities - VaR;

I am not sure about futures on interest rates, FX, commodities. I would greatly appreciate if you could help me out here.

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Comments (11)

Best Response
Nov 10, 2015

You're confounding a few distinct concepts here... VAR and others like it can be applied to any portfolio, regardless of the assets/securities in it. The more market-specific exposure measures are used, first and foremost, for PNL decomposition and explanation.

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Nov 11, 2015
undefined:

You're confounding a few distinct concepts here... VAR and others like it can be applied to any portfolio, regardless of the assets/securities in it. The more market-specific exposure measures are used, first and foremost, for PNL decomposition and explanation.

Thank you, Martinghoul.

Sure, VaR/ES and the likes can be used to any type of portfolio. No disagreement here. I just wanted to capture all the appropriate risk measures.

I'd appreciate if you could comment on the market-specific exposure measures for different sorts of instruments.

Snootchie Bootchies

Nov 12, 2015

I agree with Martinghoul.

Your question is a little ambiguous to me. I don't know anything about commodities, but as far as interest rate derivatives, you'll want to look at DV01 (linear estimate of your P&L from a 1 bp shift in the curve), your xccy risk for certain swaps, and probably volatility / liquidity if you're dealing with emerging markets.

Then out spake brave Horatius, The Captain of the Gate: "To every man upon this earth, death cometh soon or late. And how can man die better than facing fearful odds, For the ashes of his fathers, and the temples of his Gods."

Nov 12, 2015
undefined:

I agree with Martinghoul.

Your question is a little ambiguous to me. I don't know anything about commodities, but as far as interest rate derivatives, you'll want to look at DV01 (linear estimate of your P&L from a 1 bp shift in the curve), your xccy risk for certain swaps, and probably volatility / liquidity if you're dealing with emerging markets.

Hey BayStreetShark,
I am not disagreeing here. I just wanted to know if there are any other risk measures which are broadly used in monitoring associated risks of different asset classes so I could show them to my boss all the available options out there.

Thanks for the comment though.

Snootchie Bootchies

Nov 13, 2015

Nothing beats sensitivity tables that stress all your underlying risk factors ;)

Even with todays technology, when i was trading single stock vol on the sell side wit ha huge book, the best tool was printed out tables of all my risk sensitivities stressed by spot/vol/divs

On a single book level or single instrument level, the risk factors always boil down to sensitivty to underlying risks (you can call them whatever you want, be it delta/dvo1/cso1 etc but the principles behind each is hte same, move the underlying risk factor a little bit and see pnl).

VAR is something that is more useful for someone who needs to get a sense of risk on a trading floor level (i.e. head of trading floor, CFO, CEO, investors etc).

Nov 14, 2015
undefined:

Nothing beats sensitivity tables that stress all your underlying risk factors ;)

Even with todays technology, when i was trading single stock vol on the sell side wit ha huge book, the best tool was printed out tables of all my risk sensitivities stressed by spot/vol/divs

On a single book level or single instrument level, the risk factors always boil down to sensitivty to underlying risks (you can call them whatever you want, be it delta/dvo1/cso1 etc but the principles behind each is hte same, move the underlying risk factor a little bit and see pnl).

VAR is something that is more useful for someone who needs to get a sense of risk on a trading floor level (i.e. head of trading floor, CFO, CEO, investors etc).

Thank you, derivstrading.

Sensitivity tables is an interesting idea. I think DV01 does a good job for Fixed Income portfolio. Also, I have just found the following (from one of the Fabozzi series), which is more or less what I was looking for:

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Gotta find something like the above for Equities, Commodities, and FX. And maybe some Futures specific risk factors.

Snootchie Bootchies

Nov 13, 2015

Agreed with derivstrading, but I've seen this fail once with nonlinearities in the market (mostly on the EM side) when it came to explaining P&Ls.

Then out spake brave Horatius, The Captain of the Gate: "To every man upon this earth, death cometh soon or late. And how can man die better than facing fearful odds, For the ashes of his fathers, and the temples of his Gods."

Nov 14, 2015

Thats where the sensitivity table comes into play. Anyone who trades a non linear product and thinks they can get a sense of risk from a single number is bound to get a huge reality check at some point.

Nov 14, 2015

True, I see where you're coming from.

Then out spake brave Horatius, The Captain of the Gate: "To every man upon this earth, death cometh soon or late. And how can man die better than facing fearful odds, For the ashes of his fathers, and the temples of his Gods."

Nov 14, 2015

Futures are derivatives. Primary risk factors for futures will be those for the underlying asset.

Nov 14, 2015

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