pauldominic said:
metalblue said:
You'll be looking at the notional value rather than the at risk number
Example:
I buy 1 lot of copper (25 metric tonnes) at $7,400 per mt then my notional value is 25x7400=$185,000 and the person who sold it has the same notional value...so right now 1 lot of copper has created notional of $370,000 (depending on how calculated) and around 20,000 lots were traded in copper today alone. So what is at risk, well we can all agree the chances of copper going to a value of zero is nil so it is something less than the notional...what the exchange does is take a view on the potential move of copper, they will start by saying for my 1 lot I have to pay $3,000 and so does the other side (this is the initial margin) then each day the exchange will calculate a new risk (typically referred to as span margin) and you pay this and the profit/loss on the trade and this risk and the initial margin (this new risk number is based on a worst case scenario for the following day and if you don't pay the exchange liquidate the trade - the logic is that it is very reactive to market moves and global events).
All that said I do have some reservations about one of the metrics used but how it is used to other models rather than exchange margining. Now this is very basic summary and very quick as i am out bowling so probably has a few errors (and I'll review it later) but you get the idea and we have off exchange contracts that use cash and credit but banks apply strict risk limits and it may surprise you but banks want to stay in business so these risks are well managed.
It would be interesting to see how they quantify their risks.
I'm sure they want to stay in business so
their risk exposure is well managed.
Is it really acceptable to have high street banks exposed to casino banks?
The tax payer stepped in to save the high street banks.
I'd not even thought about it before the crisis but I struggle to see justifiable reason to keep the two under the same parent company, I would find it unlikely that anybody designed it this way so the taxpayer is the lender of last resort, if that was the case i would not have to have credit agree any deal with another bank like I don't when the exchange sits between us.
Splitting these should happen with global agreement in place, if for example the US says keep as is (I.e. guaranteed by the taxpayer) then that would give them a competive advantage over the split banks - most (if not all) governments have shown some desire for this to happen and I am pleased they haven't rushed into a solution.
I can't see anything happen until after the euro crisis is resolved as some banks will have funding issues and need centralised support - and before anybody gets irrate about that note it was the governments who told banks to lend to other governments as it was, in their words, "risk free" and could be considered like holding cash when calculating the Basel requirements.
As to risk calculations/management while departments exist to manage this and there are a variety of measures adopted some fairly bespoke others very generic. But very basically you have to manage position risk (using something like a VaR model), reputational risk (even to the point if I want to buy lead stored in a location up the hill from a school I will be told no due to run off risks), market abuse risks (money laundering), and counterpart risk (much more complex and subjective but usually just look at the CDS market will give you a good idea of sentiment).
