Taking The Angst Out Of Taking A Gamble

It's called value-at-risk management, and it's quickly moving into mainstream finance

In early 1994, trading operations of many big banks and brokerage firms discovered that they had accidentally put all their eggs in one basket. Sure, they had split their money between such assets as commodities, debt, and cash. But when interest rates shot up, they found that every asset class contained a built-in assumption that interest rates would fall. Debt was in long-maturity bonds; commodities were in holdings such as interest-rate futures that would appreciate if rates fell; even cash was sunk in "structured notes"--derivative securities that paid little or nothing if interest rates got too high. The result: one big splat.

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