Derivatives in Plain Words by Frederic Lau, with a ... - HKU Libraries

Annex CBYTHE FORRISKTOI. QUANTITATIVE STANDARDS• Value at risk (VAR) should be computed daily.• A 99% one-tailed confidence interval should be used.Minimum holding period (or liquidation period) would be ten tradingdays. However, banks may use the VAR numbers calculated according toshorter holding periods scaled up to ten days. In the case of optionspositions or positions that display option-like characteristics, the scaleupapproach is allowed as an interim measure only. Banks with suchpositions are expected to ultimately move towards the application ofthe minimum holding period often trading days. In allowing banks to usethe scale-up approach for options positions, supervisory authorities mayrequire these banks to adjust their capital measure for options riskthrough other methods, e.g. periodic simulations or stress testing.• The minimum sample period for calculating volatilities and correlationsis one year. For banks that use a weighting scheme or other methodsfor the historical observation period, the "effective" observation periodmust be at least one year (i.e. the weighted average time lag of theindividual observations cannot be less than six months).• Volatilities and correlations data should be updated at least quarterlyand whenever market prices are subject to material changes.• Correlation may be used to offset VAR both within and across broadrisk categories (e.g. interest rates, exchange rates, equity prices andcommodity prices).Guideline on Risk Management of Derivatives and Other Traded Instruments