Abstract:
The main purpose of financial institutions is asset management. As a result, they are
regularly faced with various risks. Central banks are not exempt. Taking into account
the Bank of Central African States where we have asked for the first time the question
on this topic, through its portfolio of assets that can in the context of the management
of its foreign exchange reserves held by its Trading Room is exposed to financial risks,
including market risk.
In general, financial institutions can deal with market risk, credit risk and transaction
risk. Over the past ten years, in accordance with all developments in financial
intermediation, the perception and management of risks incurred by financial
institutions has changed dramatically. As a result, there has been a significant change
in risk assessment and risk management methods. The measurement and management
of financial risk is thus one of the major problems within financial institutions since
they interact on the financial market by carrying out transactions on post-balance
sheet securities, forex, commodities, etc.
In a simple way, market risk is defined as the risk of losses resulting from changes in
market prices (stock prices, commodities, currencies and interest rates). Market risk is
composed of several risks in its own right: liquidity risk, currency risk and interest
rate risk.
For several years, Value At Risk (VaR) has emerged as one of the market risk
measures. It consists in estimating with a certain degree of precision (confidence level)
the loss that can occur on an asset or on a portfolio of assets on a given horizon, for
example 1 day, 10 days or 1 month, given an index selected confidence (95% or 99%).
However, the Value at Risk estimate does not take into account the realization of
extreme events that could arise and result in the loss of a portfolio. Hence the need to
dig deeper into this area.
