Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. Table of Contents I INTRODUCTION..............................................................................................................................1 II RISK AND RETURN METRICS ......................................................................................................4 1.0 Approaches to Fair Value ..........................................................................................................4 1.1 Mark-to-Market......................................................................................................................4 1.2 Mark-to-Model ........................................................................................................................5 1.3 Typical Outputs ......................................................................................................................6 1.4 Guidelines for Assigning Fair Value for Risk Measurement ..............................................6 2.0 Mechanics of Asset Valuation ...................................................................................................7 2.1 Calculation ..............................................................................................................................7 2.2 Typical Outputs ......................................................................................................................9 3.0 Value at Risk (VaR) .................................................................................................................. 10 3.1 Discussion of Metric............................................................................................................. 10 3.2 Calculation ............................................................................................................................ 11 3.3 Typical Outputs .................................................................................................................... 15 3.4 Applicability ......................................................................................................................... 17 4.0 VaR-Type Metrics .................................................................................................................... 18 4.1 Discussion of Metrics and Applicability ............................................................................ 18 4.2 Calculation ............................................................................................................................ 19 5.0 Asset Risk Metrics .................................................................................................................... 22 5.1 Discussion of Metrics ........................................................................................................... 22 5.2 Calculation ............................................................................................................................ 22 5.3 Typical Outputs .................................................................................................................... 23 6.0 Performance Metrics ................................................................................................................ 23 7.0 Tenor Metrics ........................................................................................................................... 25 7.1 Discussion of Metric ............................................................................................................. 25 7.2 Calculation ............................................................................................................................ 26 8.0 Hedge Metrics .......................................................................................................................... 26 8.1 Discussion of Metric ............................................................................................................. 26 8.2 Calculation ............................................................................................................................ 27 8.3 Typical Outputs .................................................................................................................... 28 8.4 Applicability ......................................................................................................................... 28 III SENSITIVITY ANALYSIS, SCENARIO ANALYSIS, AND STRESS TESTING ....................... 29 1.0 Discussion of Analyses ............................................................................................................ 29 2.0 Applicability ............................................................................................................................. 30 IV RISK CAPITAL ............................................................................................................................. 32 APPENDIX A – METRIC MATRIX ................................................................................................... 34 APPENDIX B – ASSET VALUATION FRAMEWORK ................................................................... 36 APPENDIX C– EXAMPLE MODELS FOR VALUING COMMODITIES TRANSACTIONS ....... 43 APPENDIX D – VaR BACK-TESTING METHODOLOGIES .......................................................... 46 APPENDIX E – DURATION ............................................................................................................. 50 APPENDIX F – PERCENTAGE HEDGED ON A VALUE BASIS .................................................. 53 REFERENCES ..................................................................................................................................... 56