Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 28 marketplace must be appropriate for the size of the underlying asset position.3. Note that the interpretation of the holding period in estimating this metric differs from the usual liquidation assumption rather, the interpretation is the length of time it would take to obtain complete risk reduction around the asset during which normal price behavior may affect the asset value adversely. A variation of this metric is the “high-confidence income level or estimate,” where the base or estimated income from the asset activity plus hedges is reduced by the amount of the VaR of the asset plus hedges, and the difference is expressed as the “high-confidence” income from the asset. Therefore, if the asset has a high level of hedging already in place, the impact of the latter would be manifest through a low VaR estimate around the total asset and hedge positions, leading to a higher value for the “high-confidence income estimate.” The situation would be the opposite when the level of hedging is low. 8.3 Typical Outputs See the Risk Management Disclosures White Paper for examples of hedge disclosures. 8.4 Applicability Table 4 compares the volume-based, value-based, and VaR-based metrics. Table 4. Comparison of Hedge Metrics Metric Advantages Disadvantages Value-based metric • Most informative measure • Available at several levels of granularity • Does not indicate the risk around what is not locked in • More difficult to calculate Volume-based metric • Easy to calculate • Easy to manipulate • Difficult to standardize • Least informative Risk-based metric • Measures the relative effectiveness of the hedge activity • Most difficult to calculate • Does not provide the value and price locked in 3 Larger positions will increase the required holding periods and also require greater market liquidity. The holding period and market liquidity will affect the VaR calculation.