DEMATERIALISING CAPITAL IN FINANCIAL FIRMS: AN OPTION BASED APPROACH

Ciccarelli Salvatore

Abstract: Risk management is at present essential to the banking business mainly as a discipline geared to the protection of depositors with a strong capital support. But risk management yields other benefits, offering a well-grounded procedure to allocate capital and to price banking products. Value at Risk (VAR) is by far the most common methodology for quantifying risk in banks’ portfolios. In this paper we explore an alternative technique. Starting from a proposal by Merton and Perold an options based approach is suggested that - alternative to the VAR methodology – outlines a significant difference between cash and risk capital.

Keywords: BANK CAPITAL; OPTION; RISK CAPITAL (search for similar items in EconPapers)
JEL-codes: G15 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc
Date: Written 2004-05-07
Note: Type of Document - pdf; pages: 22

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