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Measuring and managing market, credit and Op risk [53]

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Bullet points include: Advantage – may be constructed with great theoretical consistency Disadvantage – basing everything on equity and liability data may be ill-advised E.g. use criticised following bursting of tech bubble because they had encouraged users to think that tech/telecoms/media (TMT) companies were not risky Also, not all entities have equity parts to their capital structures Basic intuition: equity is a call option written on the firm’s underlying assets, with the strike price being its liabilities, and so is debt (but with a different strike price)

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