2.2.2 Stress TestStress Testing com

2.2.2 Stress TestStress Testing complements the VaR approach of risk measurement by identifying and quantifying the effects of extreme price or rates changes on the bank’s portfolio. The idea behind stress testing is to apply a large price change, or a combination of price changes or other parameters change (e.g. volatilities), on the subject portfolio and quantify the potential profit or loss that would result. These price changes can be derived in the following ways.• Scenario analysis – by creating potential future economic scenarios to measure the profit and loss impact on the portfolio.Historical simulation – applying actual past stress events and the corresponding price moves to the present portfolio.• Parameters shock – referring to the large changes of models or revaluation parameters such as volatilities and correlations.RMG has implemented stress testing on the FBHK portfolio based on some stress scenarios. Price moves scenarios with reference to September 11 event and the Asian 97 crisis are also built. The adopted stress scenarios are discussed with front office and could be revised according to market conditions.For equity products booked in SOPHIS, stress test tool is provided in SOPHIS and RMG performs stress test (with extreme change in both price and volatilities) on the equity portfolio on daily basis.