Valuation and Risk Models 20feb

Valuation and Risk Models

By Shivgan Joshihttp://stockcreditfinancecfa.blogspot.in/

Content

• Binomial trees• Delta Hedging• Coherent Risk• Black Scholes • Worst case distribution & Concept

Risk Neutral Approach using binomial tree

• Binomial trees• Single step model• Esd*(t)^.5

http://en.wikipedia.org/wiki/Binomial_options_pricing_model

Delta Hedging and Ratios

Coherent Risk

http://en.wikipedia.org/wiki/Coherent_risk_measure

Black Scholes (BSM Models)

• Lor normal distributed stock prices • D1• D2

• How these things comes from Stochastic Calculus

Worst case distribution

• Intensity of distribution for losses• Solution pp 124 Scz

VAR

• Volatility calculation models • ARCH (m), GARCH (1,1)• EWMA• Computing VAR with Correlations

Quantifying Volatility in VAR (a big and tough one)

• Multivariate density estimation (Kernel is an interesting thing to find)

• Back testing

Video VAR (FRM Level 1)

• Binomial• Black Scholes• Greeks• Delta normal Method• VAR at work

Video 0 VAR Methods

1. Estimating Volatilities and Correlation 2. Quantifying Volatility in VAR (a big and tough

one, and have many things)3. Monte Carlo Methods (Most interesting)

Video Lesson 1

• Strips and Arbitrage • One step Binomial Model• Risk neutral approach to option valuation• Aim 41, Recommended book Hull• Schewser

Video Lesson 2

• Story of Black Scholes• Log Normal distribution • Normal Distribution

Video lesson 3

• Greek Letters• Partial Derivatives• Hedging risk using Greeks

Video 4

• Delta Hedging• Commodity• etc

Video 5

• VAR Work• Expected Loss and Unexpected Loss

• Topic 45

Delta Normal Method

• Correlation matrix• Linear & Non linear Derivatives • Page 88 of the core readings • More of Pristine stuff than in the real book

• From Philip Zorian

VAR Historical Simulation

Known and unknown

• Expected and Unexpected

VAR Models

• Most basic formula and why root of days

Expected Shortfall

http://en.wikipedia.org/wiki/Expected_shortfall

Expected & Unexpected Loss

• Numerical

Somethings are in level 2 which may provide motivation

References