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# JP Morgan Risk Metrics Model

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 JP Morgan Risk Metrics Model
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Abhijeet S

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JP Morgan Risk Metrics Model - September 3rd, 2010

JP Morgan Risk Metrics Model

Idea is to determine the daily earnings at risk = dollar value of position × price sensitivity × potential adverse move in yield

Example of 7-year zero-coupon bonds
Price volatility = (-MD)  (Potential adverse change in yield)
= (-6.527)  (0.00165) = -1.077%
MD = D/(1+R)
If the standard deviation is 10 basis points, this corresponds to 16.5 basis points. Concern is that yields will rise. Probability of yield increases greater than 16.5 basis points is 5%.
DEAR = Market value of position  (Price volatility)
= (\$1,000,000)  (.01077) = \$10,770

Eg:

To calculate the potential loss for more than one day:
Market value at risk (VAR) = DEAR × N

Example:
For a five-day period,
VAR = \$10,770 × 5 = \$24,082
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