Term
| In a nutshell what's the basic idea behind stress testing? |
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Definition
| the basic idea is to shock key input variables bylarge amounts (unidimensional analysis) and measure the impact on portfolio value |
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Term
| How does multidimensional analysis differ from unidimensional analysis? |
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Definition
| Multidimensional analysis incorporates the correlation among risk factors and increaes the complexity of the analysis significantly. |
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Term
| What is the SPAN system used for? |
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Definition
SPAN (Standard Portfolio Analysis of Risk) system is used to recommend margin requirements on futures and options exchanges.
Focuses on overall portfolio risk (rather than risk on a position by position basis)
- SPAN estimates the effects on portoflio values ofa large set of alternative scenarios.
- The margin takes into account the largest loss that hte portfolio might suffer. |
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Term
| What's the high level steps involved in multidimensional scenario analysis? |
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Definition
Step 1: Hypothesize various states of the world
Step 2: Consider the impact on all relevant variables. |
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Term
| What general forms can multidimensional analysis take? |
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Definition
| - Historical (backward looking) or prospective (forward looking) |
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Term
| Prospective scenario analysis can use 2 methods... what are they? |
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Definition
factor push method - shifts each variable in teh direction that would adversely impact the portfolio
conditional scenario method - incorporates correlations across a subset of key risk factors |
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Term
| What's the primary disadvantage to the conditional scenario method? |
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Definition
| correlations are computed across periods of normal and stressed time periods. Therefore, the estimated correlations may not hold during a hectic time period. |
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Term
| What are some options available to risk managers to alleviate the problem of unacceptably large stress loses? |
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Definition
- alter product mix
- purchase insurance
- modify exposures
- develop contingency plans
- secure liquidity |
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