About NorWatt> Risk Terminology
Collateral
All members of Nord Pool must provide collateral to the
clearing house Nord Pool Clearing ASA. This collateral is
threefold:
- Base Collateral: The base collateral covers
overnight risk associated with intra-day position changes
not covered by the previous margin calculation. The level of
the base collateral depends on the trading pattern and
credit rating of the counterparty. The base collateral must
be covered before trading can begin.
- Variation Margin: The variation margin is the
mark-to-market value (unrealized profit/loss) of the
portfolio.
- Initial Margin: The initial margin reflects a
portfolio’s market risk during a close-out period, that is:
“How large is the worst-case loss a portfolio would have
during a close-out period of 5 days, if the prices should
move up to 3 standard deviations of observed historical
price movements?”
Standard deviation
Standard deviation is a measure of the fund’s risk. A low
standard deviation indicates that the fund’s returns are close
to the mean return, while a high standard deviation indicates
that the return is more variable. Theoretically there is 68
percent probability that the fund’s return will not differ from
the mean return by more than one standard deviation, and a 95
percent probability that it will not differ by more than two
standard deviations from its mean. Reported standard deviation
is the annualized value based on monthly returns.
Stop-loss
Measures to reduce the risk if the value of one or more
element in the overall portfolio has fallen below a
predetermined limit.
Value-at-Risk (dVaR)
Statistical simulation which indicates the maximum value
reduction in the portfolio from one day to another with 95 %
probability.
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