The key to market risk is the calculation of position risk requirement (PRR). Basel 3 has radically changed the approach to the calculation of position risk for regulated firms, and this chapter deals with the ‘before and after’ element to it. A firm must calculate a PRR in respect of all its trading book positions, all foreign exchange positions, and all positions in commodities (including physical commodities) whether or not in the trading book. A firm must also be able to monitor its total PRR on an intra-day basis. The remainder of the chapter covers trading book eligibility under Basel 2.5, trading and market exposures, equity PRR and basic interest rate PRR for equity derivatives, commodity PRR, foreign currency PRR, option PRR, credit derivatives, and underwriting positions.
Consistent pricing of VIX and equity derivatives with the 4/2 stochastic volatility plus jumps model
