Chapter 1, Page 21
Exercise 5

Give three examples of risk metrics that quantify financial risks. Choose one that quantifies exposure. Choose one that quantifies uncertainty. Choose one that quantifies uncertainty combined with exposure.

Many solutions are possible. Here are two possible answers for each of the three items:

Exposure

• Delta quantifies exposure to the value of an underlier.
• Duration quantifies exposure to parallel shifts in a yield curve.

Uncertainty

• Standard deviation of a commodity’s spot price quantifies uncertainty.
• Probability of default quantifies uncertainty.

Uncertainty combined with exposure

• Variance of a portfolio’s return quantifies uncertainty combined with exposure.
• Expected credit loss quantifies uncertainty combined with exposure.