Abstract
This paper put emphasis on market risk of financial products, by using the method of Value at Risk (VaR). Through backtesting technique to prove that the models and methods used in this paper for measuring extreme loss caused by market risk for financial products are effective. Firstly, loss distribution formula of risk exposure is defined for stock index future, foreign exchange forward and European options. Different risk factors are identified, and appropriate models are selected for risk factors. EGARCH(1,1) model is used for building risk factors of stock indexes; Dynamic Nelson-Siegal (DNS model) is selected for fitting interest rate risk factors; random walk model is used for building risk factors of foreign exchange rates. Then, Monte Carlo simulation is used to simulate all risk factors, and VaR of financial products can be derived. At last, kupiec test is used to test whether the models and methods for calculating VaR are suitable or not. Shanghai and Shenzhen 300 Stock Index future, RMB to USD foreign exchange forward and S&P500 Stock Index European options are selected for empirical research. The results show that models and methods used for VaR all passed the kupiec test, which means that market risk can be measured properly. VaR approaches defined in this paper have built solid foundations for a market risk management system taking capital charges as the core.