Measuring risk and performance for a financial institution
McLaren, Paul
This item is not available in full-text via OUR Archive.
If you would like to read this item, please apply for an inter-library loan from the University of Otago via your local library.
If you are the author of this item, please contact us if you wish to discuss making the full text publicly available.
Cite this item:
McLaren, P. (2003). Measuring risk and performance for a financial institution (Thesis). Retrieved from http://hdl.handle.net/10523/1431
Permanent link to OUR Archive version:
http://hdl.handle.net/10523/1431
Abstract:
This research evaluates the use of Value at Risk (VaR) and Return on Risk-Adjusted Capital (RORAC) as risk and performance measures for financial institutions that use derivatives. The methodology simulates the value of a hypothetical financial institution's portfolio using historically observed yield curves. The hypothetical portfolios consist of vanilla interest rate options and a stream of fixed cashflows.The methodology provides valuable information to the financial risk management industry. Firstly, it is a conceptually simple full valuation approach to VaR that is computationally efficient and can be modified to price different instruments and simulate with different sets of historical data. Secondly, it approaches the topic of risk and performance of derivatives over a short-medium term horizon.The results indicate that selling options provides healthy returns to a financial institution. Furthermore, options sold with their key variables (strike price, volatility, and time to expiry) at certain levels have a relatively lower risk and/or higher return. This may be a side effect of the way the simulations are run, or imply that VaR incorrectly measures the downside risk from short selling options. RORAC is inadequate as a risk/reward performance measure. This is primarily because VaR is a factor in its calculation, but also because it is inconsistent when comparing assets with positive and negative returns. Furthermore, it assumes a linear risk appetite of potential users.
Date:
2003
Degree Discipline:
Finance
Pages:
52
Keywords:
Value at Risk; Risk-Adjusted Capital; risk measures; performance measures; financial risk management; risk; performance; derivatives
Research Type:
Thesis
Collections
- Thesis - Masters [3048]
- Accountancy and Finance [254]