Market Risk Calculation

·        Net interest Income – Interest earned on loans – interest paid on deposits.

·        Call Options have positive deltas whereas put has negative deltas.

·        Delta = -.5 to .5 at the money, .8 or higher in the money, .2 or less out of money.

·        Generally if assets tenure is greater than liabilities tenure Bank faces Reinvestment Risk.

·        Refinancing Risk- Liability for 1 year and assets of 2 years. Bank faces risk if interest rates move up.

·        Reinvestment Risk – Liabilities for 2 years and assets for 1 year bank faces risk if interest rates go down.

·        Options at the money has highest gamma, same for call and put options, options with short term to expirations have higher gamma than that of long term options.

·        Exponential Moving Weighed Average -Volatility or Standard Deviation – lambda (0.94) * (Standard Deviation previous day) ^2 + (1- lambda) * Returns Previous Day^2.

Margins in Equity -

·        Value At Risk Margins –

Group 1 – max (3.5 * Volatility, 7.5%)

Group 11 – max (3.5 * Volatility, 3*VaR of the index * Sqrt(3).

Group 111 – 5* VaR of the Index * Sqrt(3).

Index VaR is higher of VaR of Nifty, BSE etc. or 5%.

VaR margin is calculated in gross open positions e.g. (Net Open Position of Client 1 (Buy) + Net Open Position of client 2 (Sell) +…………………. 

·        Extreme Loss Margins –

For Option and Future Contracts on individual securities-

 VaR margin + max (1.5 *Volatility of daily returns of SP in last 6 months or 5%).

For Index Options & Index Future Contracts-

Extreme loss margin is 3% of the value of future contract, in case of options charged only on short positions, and is 3% of the value of open position.

·        In Mark to market margin if price of stock decrease than paid by buyer (client pays) and if increases paid by seller (broker pays).

Margins for Equity Derivative-

·        Premium Margin – Paid by buyer of the option.

·        Assignment Margin – Paid by seller of the option.

·        Span Margin – Initial margin

Both of these margins are related to credit or risk of default, and not to market risk.

·        Available for Sale Securities – Losses are recognized daily but gains are recognized only when these securities moves to Held for Trading portfolio.

·        Exporter face risk of rupee appreciation while importer face of depreciation

·        Risk management should generate reports that are management oriented rather than report oriented.

·        Specific Risk Charge –

	Maturity	Coupon	Value
A	45 days	12.5%	25
B	9 months	9	-15 (short)

.3% for time band 0- 6 months.

1.125% for 6 – 24 months.

1.8% for 24 or more

 - Based on maturity charge on A = .3% of 25

And on B is = 1.125% of -15.

·        General Risk Charge (Systematic Risk)-

Based on market movements.

= Net Open position + Vertical Disallowance + Horizontal Disallowance.

Net Open Position –

Is calculated on net open position (Long + Short (Short has –ve value) positions) of the zone, for 1 to 3 months and for 3 to 6 months and 9 to 12 months.

Calculated as- Modified Duration multiply by exposure (Value) of each position than adding all.

Vertical Allowance – Applicable when positions are offset (smallest of mode of amount in time band) with in time bracket.

Because, of Basis Risk. Calculated on offset amount.

Value * Modified Duration * 5%.

Vertical disallowance is applicable under 3-6 month time band and 7.3- 9.3 year time band.

Horizontal Allowance –Netting of long short position across time bands. Est Than smallest of mode of amount across time bands.   When positions are offset in time bracket. Because of imperfect correlation of prices across different maturities. Yield curve risk.

·        Total risk Charge for bonds – Specific Charge + General risk charge.

·        Total Capital Charge for Equity Position – 11.25% (Specific Risk Charge) of Gross Equity Position + 9% (General Risk Charge) of Gross Equity Position.

·        Total Capital Charge for Foreign Exchange & Gold Portfolio – 9% (Specific Risk Charge) of Net Position + 9% (General Risk Charge) of Net Position.

·        There is No specific risk charge on Derivatives Position. General risk Charge is applied in same manner as for equities, Bonds and Foreign Exchange & gold Portfolios.

·        Exporters face risk of Rupee appreciation (Get paid in dollars than convert it to rupee) while importers face risk of rupee depreciation (Have to pay in dollars).

Horizontal Disallowances

0 to 1 month

40%

40%

100%

Zone 1

1 to 3 months 40%

3 to 6 months

6 to 12 months

1 to 2 years

Zone 2

2 to 3 years 30%

3 to 4 years

4 to 5 years

5 to 7 years

Zone 3

7 to 10 years 30%

10 to 15 years

15 to 20 years

Over 20 years

Net Open Position-

1 month or less 1 month or less 0.00% 1.00

1 to 3 months 1 to 3 months 0.20% 1.00

3 to 6 months 3 to 6 months 0.40% 1.00

6 to 12 months 6 to 12 months 0.70% 1.00

1 to 2 years 1.0 to 1.9 years 1.25% 0.90

2 to 3 years 1.9 to 2.8 years 1.75% 0.80

3 to 4 years 2.8 to 3.6 years 2.25% 0.75

4 to 5 years 3.6 to 4.3 years 2.75% 0.75

5 to 7 years 4.3 to 5.7 years 3.25% 0.70

7 to 10 years 5.7 to 7.3 years 3.75% 0.65