Value at Risk of Reckless Bank Plc - Term Paper Example

…………………………………………………………………xxxxx ………………………………………………………………xxxxx ..………………………………………………………………xxxxx ……….…………………………………………………………xxxxx Title ………………… Value at Risk (VaR) of Reckless Bank PLC @2015 Introduction The unexpected financial crisis in the banking industry brought serious damage to their financial performances. Reckless bank being one of the victims affected by these drastic change they resulted in a reckless risk taking without considering the consequences it attracted to them and their investors at large. This crisis brought about the question on whether the banks should alert their stakeholders to the risks they are opting to take in order to revert the situations. The major reason of this report is to evaluate the relationship between the cost of equity and the information disclosed to the public through VAR. In financial reporting, VAR is considered one of the major three methods used and as well recommend by the FRR. The method plays a major role in ensuring they give the most likely the institution is likely to suffer when operated under normal market movements. The rule of disclosing markets risks requires that the method must gauge the level of risk they are exposed to and make sure their investors can make their judgement in regards to the same facts. In a real sense, it should be a faithful model of letting them know what is happening on the ground. The FRR requires the investors the make demands of hefty compensation if they learn it after the risks have taken place (JORION, 2001). By testing, it’s revealed that the relationship between the cost of capital and VAR are positive. The results obtained are of great facts. This is even after they have taken care of various characteristics of the firms operating in that market. The relationship between the cost of equity and VAR shows that, it’s an effective measure which can be used to determine the value investors are likely to make for being exposed to the market risks. Moreover, am looking to determine whether, VAR is also accounted for in the determination of the cost of equity. I have achieved this by involving measures of complicated elements of the banks. On the other hand, the report is more effective to Reckless bank PLC whose management are thinking of taking value-at-risk in order to boost their stakeholders value. This means they will be able to make their decisions on the basis of the results they have obtained from various correlation and simulation models. Then realization of the fact that stock markets are affected by the VAR reported in terms of the results reported in an economical perspective, it brings the need to look at these results more keenly and avoid the losses which are associated with it (PENZA & BANSAL, 2001). The study also plays a vital role in showing the importance of VAR in helping them understand the risk taking criteria. VAR is still regarded as a risk measure which gives significant details which show the facts regarding it as a means of making the investors be in a position of making better decisions on the basis of the banks risk taking criteria. Discussion From the data analysis, we’re looking at the position the Value-at-risk will lead the bank to. There are several elements which have been looked at. The attached excel sheet is deemed to help the management identify the true stance which are substantiated by the workings. The users are required to depend on these figures to make sure they are truly convinced their investments will be of great benefit to them and they can support that move. Looking at the workings obtained from the banks data, we can state that the more the risks are the better the company will perform if they don’t happen. Ideally, what the calculations are trying to justify is that they are showing that the VAR is an effective method which can be used by the investors to see the true image of their target company. Starting with their financial position, we have seen that they were low as compared after they used the VAR in their operations. The management needs to undertake such risks by looking at their history. From their past, we are hoping things will continue in the same rate and they will be able to meet the desired results as they have not shown any signs of depreciation. The growth rate has a strong indication that they are moving on a positive line which will lead even to better performance in the future. The risk level they are taking is necessary to prepare for the future in case things work against their norms. However, this method is more complicated, and banks find it dubious to use it during their financial reporting as required by the FRR. For the user, they need to understand VAR well in order to make their decisions wisely. FRR mandates that, all companies dealing with financial matters must make sure they have provided well-defined reports accompanied by the changes in their interest rates, their current exchange rates, their product prices, and their trading equity price. These regulations are meant to help the users to understand the trends in business and address the concerns brought about by the various users. As mentioned earlier, VAR is one of the recommended disclosing methods which companies need to follow to the letter. From the attached worksheet, their share prices have increased as a result of their better performance. This means, the investors are likely to get more dividends at the end of their financial year. Reckless Bank plc. Should depend on VAR to report the market risks they are exposed to. In my argument, their trading practices are of economic importance to their shareholders. For example, they have two shareholders who need to benefit from their investment and the amount of shares they are holding in the Bank. Their trading activities are aimed at boosting their financial performance as highlighted in the VAR workings. It’s their role to make sure the investors gain from their trading activities. Therefore, they are required to make sure they inform the investors what risk levels they are exposed to as they make such decisions rather than to know it when they have faced losses. Depending on a worksheet, we are assessing the manner in which VAR can be observed on a daily profit and loss computations. Their performance on shows an impressive movement which they need to remain focused to. This will motivate their investors if they maintain constantly (WONG, 2013). VAR is used to determine the banks volatility and its beta. Moreover, it helps in showing the cross-sectional view of the banks performance over time and what level of returns they are expecting. In a nutshell, VAR is directly related to the banks future return on stock volatility. The calculations helps us to back this report in more reliant manner. Despite the limitations of using VAR from the inferred forecast used to determine the true view of the results. On making decisions, the level of risk is expected to help in decisions making on the basis of the degree they can diverge at. Some risks are worth taking while others are not, in this case this method is useful and it has played a vital role in their operations. Before embarking on the level of risks to accept or reject its necessary looking at the manner in which risks and costs relate with each other. When determining the performance of any financial institution like the Reckless bank plc, it’s essential for the valour’s to make sure they have put a number of factors into considerations. One of the major factors is the ratio analysis. This report is a true reflection of the workings on the spreadsheet. If they are not correctly computed, then they will mislead the entire process. A similar situation is applied when determining VAR. If the data is not correlated well, the decisions will be based on false data. We are looking at these results in a closely manner to make sure we get to the right base of the facts. History plays a vital role in showing the manner in which a given firm has been operating. Two to three years reports are enough to show the trend before forecasting can be used to look at their trends. This report shows the similarities which are spread over the trading period covered by the data they have provided. Similarly, VAR computed for the base year and the preceding year are enough to show what will happen in the future date (DEMPSTER, 2002). Looking at the valuation and revaluations over the trading period, you will find out that they have improved on their value. When ratio analysis of two or three financial years is looked at keenly, they are able to drawing the line correlation on what will happen if some factors are held constant. The financial fluctuations are used mainly to determine the expected changes in the future dates. If the ratios obtained are not stable it shows they are likely to be some fluctuations too in the future, and there is raises the level risks rates (SAUNDERS & ALLEN, 2002). When the state is stable, it shows the chances of fluctuations are minimal. In our case we can believe on a strong development over time. Looking at the rate of returns we can conclude that the banks rate of return is favourable, and investors can take it. The price per share also seems to be rising. Looking at the coupons at their issue date they were valued at $110 and during trade-offs they had increased to $113. This is an indication that the bank was performing well in the market, and they are likely to better in the future. According to VAR the bank had a positive indication which are also backed up by the computations provided. These investors, therefore, need not to worry for what they had invested seems to be doing well in the market, and their returns are guaranteed (DUARTE, 2006). On the comparison of the VAR and the linear model, there is an impressive indication that they are likely to get the right results because the value of stakeholder’s value is increasing consistently which shows their investment needs are being catered for, and they will increase their worthwhile. On the contrary, these indications do not guarantee the interest rates to rises due to insecurity but remain constant or decrease because they are not likely to lose anything as a result of the same transactions. In marketing and trading, business people look for opportunities where they will make profits. In our case, the investors have something to smile about for their decisions to buy the company’s stock. The decision to reinvest still remains high. However, they should take precautions as trends are not guaranteed they will remain the same throughout. Looking at the stock volatility, the market seems to be increasing the stock prices. This means the chances of getting a decrease are high too. In this case, the investors need to understand the pricing dynamics which are the leading increase in prices of their stocks. This will save them a million times from falling victims of sudden changes in its price living them being losers in the market. Conclusion As I conclude this report, I would like to mention that, changes in the value of VAR are likely to occur if the trends in the market take a different direction. As the bank is aiming to make its value-at-risk need to understand what the investors are looking for and the possible changes they are likely face during the trading periods (BATTLEY, 2000). Am convinced that this method is very effective as it makes the investors think before making blind decisions. Managers at the bank needs to make sure they considers all possible movements before they can make decisions. The reports they generate must be of utmost faith as they can lead to massive losses, and they can also be accounted for blackmailing the investors. In this case am looking at the straightforward opinions which they are required to give as they guide the investors. The results should be made independently and not as a combined product which is ambiguous and not easily understood by the investors. They should also avoid using professional jargons in their report. This will show their transparency, and they will get more value in the market as a result. However, if these measures are compromised, they will be deceiving the stakeholders and the general public at large. In this case, VAR should be used by the investors to understand what is really happening and what they need to do and help them meet the needs pushing and pulling them in the business as their investors (ALLEN, BOUDOUKH, & SAUNDERS, 2004). Linear correlation should be used to draw the decision line between them all. In addition, ratios should be done accurately and explained in details for the purposes of understanding. Bibliography ALLEN, L., BOUDOUKH, J., & SAUNDERS, A. (2004). Understanding market, credit, and operational risk: the value at risk approach. Malden, MA., Blackwell. BATTLEY, N. (2000). The worlds futures & options markets. Chichester, Wiley. BERNSTEIN, J., & PETERSON, K. A. (2002). Profit in the futures markets!: insights and strategies for futures and futures options trading. Princeton, Bloomberg Press. DEMPSTER, M. A. H. (2002). Risk management value at risk and beyond. Cambridge, Cambridge University Press. DUARTE, J. (2006). Futures & options for dummies. Hoboken, NJ, Wiley Pub., Inc. HULL, J., & HULL, J. (2002). Fundamentals of futures and options markets. Upper Saddle River, N.J., Prentice Hall. JORION, P. (2001). Value at risk the new benchmark for managing financial risk. New York, McGraw-Hill PENZA, P., & BANSAL, V. K. (2001). Measuring market risk with value at risk. New York, John Wiley. SAITA, F. (2007). Value at risk and bank capital management. Amsterdam, Elsevier Academic Press. SAUNDERS, A., & ALLEN, L. (2002). Credit risk measurement new approaches to value at risk and other paradigms. New York, John Wiley. WONG, M. C. Y. (2013). Bubble value at risk a countercyclical risk management approach. Singapore, Wiley. Appendix Read More