Emerging Practices for Capital Adequacy © Copyright 2003, CCRO. All rights reserved. 26 Table 4: Comparison of Trading and Non-trading Activity Trading Non-trading Purpose ▪ Positions to facilitate marketing ▪ Proprietary trading positions ▪ Positions generated by asset/customer business ▪ Strategic “buy and hold” hedges Liquidity ▪ Liquid, actively funded positions across many markets ▪ Holding period measured in days/weeks ▪ Illiquid or “buy and hold” positions ▪ Holding period measured in months/years Optionality ▪ Price-driven exchange traded or OTC options ▪ Short holding period allows linear approximations ▪ Asset/Customer-driven embedded options ▪ Long holding period makes non-linearity material Valuation ▪ Short-term volatilities and correlation ▪ Jump Diffusion, intra-day VaR -Analytical, Simulation ▪ Long-term volatilities and correlation ▪ Mean reversion, seasonality Simulation, Earnings at Risk Risk Management/Intervention ▪ VaR limit reduction, stop- loss limits, hedging with traded instruments ▪ Structured solutions, contract re-negotiations, asset sales and purchases