Wolfgang Eisele

Value at Risk: Tool for Managing Trading Risks*

This article surveys the appropriateness of Value at Risk as a tool for managing trading portfolios. We introduce various calculation methods and give a synopsis of their pros and cons with respect to accuracy, implementational aspects as well as suitability for resource allocation and optimization. We contribute to existing approaches for capital allocation and provide an optimization model. Finally, we demonstrate shortcomings of Value at Risk as a measure of risk. The focus is on compatibility with decision theory and its relation to coherent measures of risk. Thereby, we discuss alternatives to Value at Risk such as Lower Partial Moment One or tail conditional expectation. We give some reasons to prefer the latter as an alternative to Value at Risk and suggest that under certain conditions the tail conditional expectation is compatible with second order stochastic dominance.

Strukturierte Anleihen und Bilanzrechtsauslegung

SummaryWith respect to German accounting standards it is still a critical issue whether to account for hybrid financial instruments as one item or to separate the embedded derivative. The proposals that deal with this problem by adopting, more or less, IAS 39 are not in accordance with the objectives of these standards. We develop criteria within the German GAAP on how to account for these instruments in general, and show how this affects the accounting for specific types. We elaborate on what characterizes an inseparable item and draw the conclusion that the embedded derivative should not be separated mostly. Recognizing an instrument as one item rather than as two or more items results in smaller differences in equity compared to IAS 39 for subsequent periods. The issue is of interest when both accounting frameworks are used: one for financial statements of the group, the other for financial statements of the legal entities.