Market Risk for Foreign Currency Options: Basle's Simplified Model
We show that capital charges for foreign currency options estimated using a standardized model proposed by the Basle Committee on Banking Supervison are not consistently related to value at risk (VAR). We propose a simplified incremental model (SIM) and a simplified value at risk (SVAR) model and compare them to an internal model based on J.P. Morgan's RiskMetricsTM. We conclude that it is possible to construct a standardized model that is as effective as an internal model, especially for small portfolios. Since inaccurate forecasting under internal models is now subject to penalties, some banks may prefer standardized models.
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Volume (Year): 28 (1999)
Issue (Month): 1 (Spring)
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