JP Morgan Chase 2003 Annual Report Download - page 70

M anagement’s discussion and analysis
J.P. M organ Chase & Co.
68 J.P. Morgan Chase & Co. / 2003 Annual Report
The inset in the histogram examines the 25 days on w hich the
Firm posted trading losses and depicts the amount by w hich VAR
w as greater than the actual loss on each day. There w as one day
on w hich trading losses exceeded VAR by approximately 10% , a
performance statistically consistent w ith the Firm’s 99% confi-
dence level. During the third quarter, there was an additional day
on w hich the Firm’s losses exceeded VAR; these losses w ere
attributable to certain positions in the mortgage banking busi-
ness, w hich w ere then included in the Firm’s trading portfolio,
but w hich are now included in the nontrading portfolio w ith
other mortgage banking positions.
< (40)
(20) > < (10)
(10) > < 0
0 > < 10
10 > < 20
20 > < 30
30 > < 40
40 > < 50
50 > < 60
60 > < 70
70 > < 80
80 > < 90
90 > < 100
100 > < 110
> 110
(30) > < (20)
(40) > < (30)
Daily market risk-related revenue for trading businesses
Number of trading days
Average daily revenue: $37.0 million
The graph below depicts the number of days on which JPM organ Chase's market risk-related
revenues fell w ithin particular ranges. The inset graph to the right looks at those days on which
the Firm experienced trading losses and depicts the amount by w hich the VAR exceeded the
actual loss on each of those days.
0
10
20
30
40
50
$ in millions
0
2
4
6
8
10
12
< 0
0 > < 20
20 > < 40
40 > < 60
60 > < 80
> 80
$ in millions
Number of trading days
Daily VAR less trading losses
0
Economic-value stress t est ing
While VAR reflects the risk of loss due to unlikely events in nor-
mal markets, stress testing captures the Firm’s exposure to
unlikely but plausible events in abnormal markets. Stress testing
is equally important as VAR in measuring and controlling risk.
Stress testing enhances the understanding of the Firm’s risk pro-
file and loss potential and is used for monitoring limits, cross-
business risk measurement and economic capital allocation.
Economic-value stress tests measure the potential change in the
value of the Firm’s portfolios. Applying economic-value stress
tests helps the Firm understand how the economic value of its
balance sheet (not the amounts reported under GAAP) would
change under certain scenarios. The Firm conducts economic-
value stress tests for both its trading and its nontrading activities,
using the same scenarios for both.
The Firm stress tests its portfolios at least once a month using multi-
ple scenarios. Several macroeconomic event-related scenarios are
evaluated across the Firm, w ith shocks to roughly 10,000 market
prices specified for each scenario. Additional scenarios focus on
the risks predominant in individual business segments and include
scenarios that focus on the potential for adverse moves in com-
plex portfolios.
Scenarios are continually reviewed and updated to reflect changes
in the Firm’s risk profile and economic events. Stress-test results,
trends and explanations are provided each month to the Firm’s
senior management and to the lines of business, to help them
better measure and manage risks and to understand event risk–
sensitive positions.
The Firm’s stress-test methodology assumes that, during an
actual stress event, no management action w ould be taken to
change the risk profile of portfolios. This assumption captures
the decreased liquidity that often occurs w ith abnormal markets
and results, in the Firm’s view, in a conservative stress-test result.
It is important to note that VAR results cannot be directly corre-
lated to stress-test loss results for three reasons. First, stress-test
losses are calculated at varying dates each month, w hile VAR is