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Value-at-Risk model (VAR) |
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Definition of Value-at-Risk model (VAR)Value-at-Risk model (VAR)Procedure for estimating the probability of portfolio losses exceeding some
Related Terms:economic components modelAbrams’ model for calculating DLOM based on the interaction of discounts from four economic components. Gordon modelpresent value of a perpetuity with growth. log size modelAbrams’ model to calculate discount rates as a function of the logarithm of the value of the firm. NPV (net present value of cash flows)Same as PV, but usually includes a subtraction for an initial cash outlay. PV (present value of cash flows)the value in today’s dollars of cash flows that occur in different time periods. QMDM (quantitative marketability discount model)model for calculating DLOM for minority interests r the discount rate Adjusted present value (APV)The net present value analysis of an asset if financed solely by equity Arbitrage-free option-pricing modelsYield curve option-pricing models. Asset pricing modelA model for determining the required rate of return on an asset. Asset pricing modelA model, such as the Capital Asset Pricing model (CAPM), that determines the required Bankruptcy riskThe risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. Basis riskThe uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for Binomial option pricing modelAn option pricing model in which the underlying asset can take on only two Black-Scholes option-pricing modelA model for pricing call options based on arbitrage arguments that uses Bond valueWith respect to convertible bonds, the value the security would have if it were not convertible Book valueA company's book value is its total assets minus intangible assets and liabilities, such as debt. A Book value per shareThe ratio of stockholder equity to the average number of common shares. Book value Business riskThe risk that the cash flow of an issuer will be impaired because of adverse economic Call riskThe combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Capital asset pricing model (CAPM)An economic theory that describes the relationship between risk and Carrying valueBook value. Cash-surrender valueAn amount the insurance company will pay if the policyholder ends a whole life Commercial riskThe risk that a foreign debtor will be unable to pay its debts because of business events, Company-specific riskRelated: Unsystematic risk Completion riskThe risk that a project will not be brought into operation successfully. Constant-growth modelAlso called the Gordon-Shapiro model, an application of the dividend discount Continuous random variableA random value that can take any fractional value within specified ranges, as Conversion valueAlso called parity value, the value of a convertible security if it is converted immediately. Counterparty riskThe risk that the other party to an agreement will default. In an options contract, the risk Country financial riskThe ability of the national economy to generate enough foreign exchange to meet Country risk GeneralLevel of political and economic uncertainty in a country affecting the value of loans or CovarianceA statistical measure of the degree to which random variables move together. Credit riskThe risk that an issuer of debt securities or a borrower may default on his obligations, or that the Cross-border riskRefers to the volatility of returns on international investments caused by events associated Currency riskRelated: Exchange rate risk Currency risk sharingAn agreement by the parties to a transaction to share the currency risk associated with Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an Deterministic modelsLiability-matching models that assume that the liability payments and the asset cash Discounted dividend model (DDM)A formula to estimate the intrinsic value of a firm by figuring the Discrete random variableA random variable that can take only a certain specified set of discrete possible Diversifiable riskRelated: unsystematic risk. Dividend discount model (DDM)A model for valuing the common stock of a company, based on the Dividend growth modelA model wherein dividends are assumed to be at a constant rate in perpetuity. Economic riskIn project financing, the risk that the project's output will not be salable at a price that will Endogenous variableA value determined within the context of a model. Equilibrium market price of riskThe slope of the capital market line (CML). Since the CML represents the Event riskThe risk that the ability of an issuer to make interest and principal payments will change because Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Exchange riskThe variability of a firm's value that results from unexpected exchange rate changes or the Exercise valueThe amount of advantage over a current market transaction provided by an in-the-money Exogenous variableA variable whose value is determined outside the model in which it is used. Also called Expected valueThe weighted average of a probability distribution. Expected value of perfect informationThe expected value if the future uncertain outcomes could be known Extraordinary positive valueA positive net present value. Extrapolative statistical modelsmodels that apply a formula to historical data and project results for a Face valueSee: Par value. Factor modelA way of decomposing the factors that influence a security's rate of return into common and Fallout riskA type of mortgage pipeline risk that is generally created when the terms of the loan to be Financial riskThe risk that the cash flow of an issuer will not be adequate to meet its financial obligations. Firm's net value of debtTotal firm value minus total firm debt. Firm-specific riskSee:diversifiable risk or unsystematic risk. Flat price riskTaking a position either long or short that does not involve spreading. Force majeure riskThe risk that there will be an interruption of operations for a prolonged period after a Foreign exchange riskThe risk that a long or short position in a foreign currency might have to be closed out Funding riskRelated: interest rate risk Future valueThe amount of cash at a specified date in the future that is equivalent in value to a specified Garmen-Kohlhagen option pricing modelA widely used model for pricing foreign currency options. Geographic riskrisk that arises when an issuer has policies concentrated within certain geographic areas, Herstatt riskThe risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk. Idiosyncratic RiskUnsystematic risk or risk that is uncorrelated to the overall market risk. In other words, Index modelA model of stock returns using a market index such as the S&P 500 to represent common or Inflation riskAlso called purchasing-power risk, the risk that changes in the real return the investor will Insolvency riskThe risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Intrinsic value of an optionThe amount by which an option is in-the-money. An option which is not in-themoney Intrinsic value of a firmThe present value of a firm's expected future net cash flows discounted by the Investment valueRelated:straight value. Liquidation valueNet amount that could be realized by selling the assets of a firm after paying the debt. Liquidity riskThe risk that arises from the difficulty of selling an asset. It can be thought of as the difference Loan valueThe amount a policyholder may borrow against a whole life insurance policy at the interest rate Market modelThis relationship is sometimes called the single-index model. The market model says that the Market price of riskA measure of the extra return, or risk premium, that investors demand to bear risk. The Market riskrisk that cannot be diversified away. Related: systematic risk Market value1) The price at which a security is trading and could presumably be purchased or sold. Market value ratiosRatios that relate the market price of the firm's common stock to selected financial Market value-weighted indexAn index of a group of securities computed by calculating a weighted average Maturity valueRelated: par value. Mean-variance analysisEvaluation of risky prospects based on the expected value and variance of possible outcomes. Mean-variance criterionThe selection of portfolios based on the means and variances of their returns. The Mean-variance efficient portfolioRelated: Markowitz efficient portfolio Minimum-variance frontierGraph of the lowest possible portfolio variance that is attainable for a given Minimum-variance portfolioThe portfolio of risky assets with lowest variance. ModelingThe process of creating a depiction of reality, such as a graph, picture, or mathematical Mortgage-pipeline riskThe risk associated with taking applications from prospective mortgage borrowers Net adjusted present valueThe adjusted present value minus the initial cost of an investment. Net asset value (NAV)The value of a fund's investments. For a mutual fund, the net asset value per share Net book valueThe current book value of an asset or liability; that is, its original book value net of any Net present value (NPV)The present value of the expected future cash flows minus the cost. Net present value of growth opportunitiesA model valuing a firm in which net present value of new
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