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New York Morgan Guaranty Trust Company

January 23, 1996 Risk Management Services


Jacques Longerstaey (1-212) 648-4936
riskmetrics@jpmorgan.com

RiskMetrics Monitor
First quarter 1996

BIS revises market risk supplement to 1988 Basle Capital Accord


Expanding the parametric VaR approach for the treatment of options
Introducing a new tool for loading RiskMetrics data into an Excel spreadsheet
Lessons learned from implementing the RiskMetrics data synchronization algorithm

This quarter, along with the section titled RiskMetrics News, we address the following
subjects:

On December 12, 1995, the Basle Committee on Banking supervision released a


communiqu announcing the publication in January 1996 of a revised supplement to
the 1988 Basle Capital Accord which deals with market risk.
Responding to the reactions by the banking community to the initial draft of the proposal to
allow financial institutions to use internal models to estimate market risk as a basis for setting
capital requirements, the Basle Committee has modified one of the quantitative provisions of
the model-based approach: Subject to approval by domestic regulators, banks will be allowed
to account for correlation effects across asset classes.

While simulation is often portrayed as the preferable solution in estimating market


risks for portfolios which contain sizeable positions in nonlinear instruments,
parametric approaches can be refined and implemented to effectively deal with non-
normal P/L distributions.
This article looks at two methodologies which use a basic delta-gamma parametric VaR
precept but achieve similar results to the simulation approach at a much lower cost in
terms of computational intensity.

To enable users to develop customized Excel spreadsheet based applications, we


have developed an Add-In tool that can both access volatility and correlation data from
the datasets and perform basic VaR calculations.
The RiskMetrics Add-In tool will be available by February 1, 1996 from our Internet
site. It will be accompanied by a set of RiskMetrics volatility and correlation datasets
specifically formatted for use with the Add-In. These files will be updated on a daily basis
along with the standard sets.

The data synchronization algorithm outlined in the Third quarter 1995


RiskMetrics Monitor will be implemented at the end of February 1996.
In this section, we review some of the lessons learned in testing the algorithm, including
some modifications which were made to the original methodology, as well as what
segments of the RiskMetrics dataset will be affected by the changes.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 2
Jacques Longerstaey (1-212) 648-4936
riskmetrics@jpmorgan.com

RiskMetrics News
Upcoming changes to the RiskMetrics datasets
At the end of February 1996, the following changes will be made to the RiskMetrics
volatility and correlation datasets which are posted daily on the Internet:

1. The revised methodology outlined in the last edition of the RiskMetrics Monitor (Fourth
quarter 1995) to estimate volatility over a 25-day (1-month) horizon will be implemented.

2. The data synchronization algorithms detailed in the RiskMetrics Monitor (Third quarter
1995) and revised in the fourth article of this document will be implemented.

3. The 1-day and 1-week RiskMetrics vertices for money market interest rates will be dropped
from the daily volatility and correlation files. In testing the data synchronization algorithms,
we discovered that the infrequent daily changes in these rates interfered with the process used
to adjust data for time zone differences. Also, given the low level of price volatility at the very
short end of the curve, we felt that users could safely anchor cash flows at the 1-month vertex.
The global benefit achieved by adjusting the data for timing differences outweighed the effect
of dropping the two low-end vertices.

Summit System, Inc. joins ranks of RiskMetrics developers


Summit System, Inc.
20 Exchange Place, New York, NY 10005
Harvey Rand (1-212) 269-6990, FAX (1-212) 269-6941, sumsales@pipeline.com

Summit-VaR is an extensive family of tools that has been enriched with a comprehensive
collection of VaR analyses which includes among other analytic capabilities, the
J.P.Morgan RiskMetrics methodology.

Summits RiskMetrics methodology is geared toward estimating the global risk of linear
positions. A complementary scenario analysis, based on stress testing, has been implemented
for options products to capture gamma risk. Summit VaR series also include specific
analyses for bond-related products in the emerging markets, where the lack of liquidity of
some portion of the yield curve may not allow traditional interest rate based analysis to
capture the risk properly.

As with its coverage of interest rate products, Summit also provides a Forex VaR implemen-
tation utilizing the RiskMetrics approach. Finally, with an optional parametric approach,
Summit generates historical VaR figures based on the past behavior of the markets.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 3
Jacques Longerstaey (1-212) 648-4936
riskmetrics@jpmorgan.com

Basle Committee revises market risk supplement to 1988 Capital Accord


Revised proposals allow On December 12, 1995, the Basle Committee on Banking Supervision announced that it would
use of correlations across publish a revised version of the Supplement to the 1988 Basle Capital Accord during the course
asset classes of the month of January. The original version of this supplement which incorporated proposals
defining the scope and usage of internal bank models to estimate market risks was made public
Banks will be allowed to
in April 1995 and opened for comment by financial institutions.
scale up daily VaR
numbers to 10-day
The revised proposals, set to be implemented by the end of 1997, essentially address two of
regulatory horizon
the concerns banks expressed in their official responses to the original draft:
Other qualitative and
Internal bank models will be allowed to use correlations both within and across asset classes
quantitative standards are
to estimate a fully diversified Value at Risk.
unchanged
Banks will be allowed to scale up their (mostly) daily internal Value at Risk estimates to the
10-day horizon required by the regulatory authorities. Banks had argued in their response to
the original proposal that it would be burdensome for them to maintain two frameworks for
estimating market risk using different horizons and that it would be prohibitively expensive to
back-test models for the 10-day horizon as firms would be required to keep position and price
data for 10 overlapping portfolios.

None of the other quantitative standards (10-day risk horizon, 99% confidence, at least 1-
year historical volatility data, capital charge based on the higher of the VaR estimate or
three times the average VaR over the preceding 60 business days) have been modified.

The changes do not affect the RiskMetrics Regulatory


dataset as it is currently produced. The estimates of volatil-
ity which are published daily are based on a 1-day, 95%
confidence basis and can easily be rescaled. Correlations
both within and across asset classes are included in the
dataset files. Further the RiskMetrics regulatory datasets
have recently been expanded to incorporate all information
which was previously only included in the standard sets
such as yield data.

While addressing some of the concerns of financial institutions, the revised proposals are
still unclear on a number of issues:
While the document mentions that banks will be allowed to use correlations across asset
classes, the document makes their use subject to approval by individual country supervi-
sors, which will judge the integrity of the methodology used. Supervisors will therefore
be burdened with the added responsibility of verifying whether correlations are updated
regularly and tested for stability (which can have a different meaning whether one is speaking
to an economist or statistician). How this will be implemented in practice remains to be seen.
Banks will be allowed to scale up their daily VaR estimates to arrive at the 10-day holding
period. It is not clear which methodologies will be permitted (square root of time?) and what
impact this will have on back testing the results. It has been our experience that back-testing a
daily VaR estimate would tell little about the accuracy of a 10-day holding period model.

These points may be clarified when the complete document is released some time this
month. We suspect, however, that the proposals may be interpreted differently by country
supervisors and that the exact modus operandi of the proposals will be made clearer through
implementation experience.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 4
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

A VaR methodology for portfolios that include options


Risk managers who implement Value at Risk (VaR) systems frequently face the daunting
task of measuring the risk of a portfolio that contains options. The nature of this problem
results from the standard VaR assumption that portfolio return distributions are condition-
ally normal. Among other things, this implies that return distributions are symmetric.
However, due to the payoff structure of options, many portfolios that include options have
return distributions that are, at the very least, skewed.1 In this article we suggest a modifica-
tion to standard VaR computations that offer practitioners a means of estimating the risk of
a portfolio that includes options.

In its standard context VaR estimates are given by the bands of a symmetric confidence interval
around the expected value of a portfolios return. These bands represent the largest expected
change in the value of the portfolio with a specified level of probability. For example, if RP is the
return on a portfolio with mean E(RP), its 90% confidence interval is given by:

Cv = {1.65 P + E( RP ), E( RP ) + 1.65 P}

where -/+ 1.65 are the 5th/95th percentiles of the standardized normal distribution. Over short
horizons, the estimate of E(Rp) is often set to zero to reduce the noise in estimating the sample
mean.2

In general, when a portfolios payoff is a nonlinear function of some underlying returns,


even if these returns are distributed normally, the confidence interval estimate for the
expected value of the portfolio using CV is inappropriate. For example, portfolios with
nonlinear payoffs may have skewed return distributions. Skewness invalidates the applica-
tion of symmetry imposed by the scale factors +/- 1.65 (the quantiles of the standard normal
distribution). In addition, nonlinearities transform the moments (e.g., mean, variance,
skewness, etc.) of the underlying return distribution. Therefore, assumptions placed on the
expected values of underlying returns do not necessarily carry over to a portfolios expected
values.

In order to properly evaluate the risk of a portfolio that contains nonlinear instruments,
researchers often propose full simulation routines. According to this methodology, a path of
future underlying prices are generated and the portfolios value, which consists of options,
is revalued at various prices along the path. A specific type of full simulation, known as
Structured Monte Carlo, is outlined in the RiskMetrics Technical Document. A major
disadvantage of the full simulation approach is that it is computationally and time intensive.

This study presents two methods to compute the Value at Risk estimates of portfolios with
nonlinear payoffs that do not require full simulation. Its goal is to present a methodology
that is relatively simple to implement and does not require a lot of computer time. The methodol-
ogy is developed from first principles and is used to compute the VaR over a five-week
horizon of the following position.3

On April 18, 1995, a U.S. dollar based investor buys a USD1,000,000 nominal value 2-year
French franc government bond (OAT Strip) at a yield of 7.147%. In order to hedge FX expo-
sure, the investor buys a 5-week (which corresponds to the investment horizon) FRF/USD put

1 In fact an options return distribution is a mixture of discrete and continuous variables.


2 See RiskMetrics Technical Document for details.
3 This position originally appeared in the RiskMetrics Technical Document, 3rd edition.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 5
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

option on a notional USD 870,994 at the money forward FX rate of 4.864. The current value of
the option is FRF/USD 0.04616. Therefore, it costs USD 8,289 to hedge USD 870,994.

Market risk is often analyzed in terms of its delta (1st order) and gamma (2nd order) risk.
Below, in the case where VaR incorporates gamma risk, we compare results obtained using
the methods described herein to those given by full simulation which serves as our bench-
mark. In so doing we highlight important differences and similarities among the different
methodologies. To facilitate the discussion we will use the following definitions and
parameter settings.

PV = Amount of current position in USD (present value) PX(t +1) = any future value of PX(t)
= USD870,994
RB = 5-week return on 2-year OAT Current spot rate FRF/USD=4.855
B = 5-week forecast standard deviation of bond price 1-month forward FRF/USD rate=4.684
= 0.7757% (yield standard deviation=5.83%)
RX = 5-week return on FRF/USD exchange rate Current 2-year OAT yield=7.147%
X = 5-week forecast standard deviation of FX rate Current 2-year USD yield=6.125%
= 3.117%
= 0.532 = 3.15
RO = return on FX option B, X = correlation of OAT and FX rate
= -.291

We analyze the risk of the synthetic portfolio as follows. First, the option is ignored and we
compute the Value at Risk of the position that consists only of the purchased OAT. We then
introduce the option to hedge foreign exchange risk on the OAT. We focus on two specific types
of market risk associated with holding the option delta risk and gamma risk. Initially we focus
exclusively on delta risk since the standard VaR methodology is still applicable. Next, gamma
risk is added. Now, the nonlinearity of the options payoff dominates the portfolios return
distribution. Since standard VaR methodology is no longer appropriate, we use a normal
analytical approximation known as the Cornish-Fisher expansion to find the percentiles of this
portfolios distribution. These percentiles are then used to estimate VaR. Finally, we conduct an
experiment to determine how the normal approximation performs. The method used in this
experiment, which we refer to as partial simulation, actually turns out to be an alternative
technique that may be used to compute VaR in the presence of gamma risk.

The unhedged position


Suppose the investor buys the OAT but does not hedge its foreign exchange exposure. In this
case the return on the portfolio, RP, is simply the sum of the returns on the FRF/USD and OAT
which is written as RP=RX + RB. Its standard deviation is:

[1] 1 = 2B + 2X + 2 * B, X B X

Assuming that RX and R B are normal, as in standard VaR, we know that RP is also normal so the
Value at Risk of holding the foreign bond is

[2] VaR1 = PV * (1.65) * 1 = USD 42, 907

Hedging FX exposure

In an effort to reduce foreign exchange market risk the investor buys a put option on the FRF/
USD exchange rate. Having purchased the put option, the return on the portfolio that also
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 6
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

consists of the OAT is now RP=RB+RX+RO . In order to compute the return on the portfolio, RP,
we need an expression for the return on the option, RO. We value the FX option using the
Garman-Kohlhagen formula. Specifically, for a given set of parameters denote the options
value by V(PX(t),K,,,X) where:

PX(t) = FRF/USD spot rate at time t

K = the options exercise price

= time to maturity in terms of a year

= riskless rate of a security that matures when the option does

X = 5-week forecast standard deviation of FX rate

A first step toward obtaining an expression for RO is to approximate the future value of the
option V( PX(t +1) ,K,, r, X) with a 2nd-order Taylor series expansion around the current values
(spot rates), PX(t) , K, , r, and X. This yields4

1
[3] V ( PX (t +1) , K , r, , X ) Vo ( PX (t ) , K, r, , X ) + ( PX (t +1) PX (t ) ) + 2 ( PX (t +1) PX (t ) )
2

1
which can be written more succinctly as dV = dPX + (dPX ) 2 where the options delta
2
() and gamma () are equal to 0.532 and 3.15, respectively.

Note dV, the absolute change in the value of the option, is in units of PX. This follows from the
fact that is unitless and is in units of 1/PX. Since RiskMetrics currently provides the
volatility of returns we write dV as a function of relative price changes

2
dP 1 dP
dV = Px(t) * * x + * Px(t)
2
** x
x(t)
P 2 Px(t)
[4] or

dV = Px(t) * * (R x ) + * * (R x )
1 2 2
* Px(t)
2
Here, dV relates an absolute change in the value of the option to a relative change in the foreign
exchange rate. However, since dV is still in units of PX we need to standardize it to make it
unitless. This allows us to obtain the relative return on the option

1
[5] R o = * (R x ) + * Px(t) * * (R x )2
2

Therefore, the return on the portfolio of the hedged position RP=RB+RX+RO is

PX(t) (R X )
1 2
[6] R P = RB + RX + R X +
2

4 In the following expression, delta () is the first derivative of V with respect to PX and gamma () is the second
derivative of V with respect to PX.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 7
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

Since the investor is purchasing a put to hedge foreign exchange risk, < 0. For ease of exposi-
tion we will use = in the following analysis. Notice from [6] that we can compute two
types of Value at Risk estimates. The first incorporates the linear risk of the option. In this case,
we use only the first three terms of [6]. Alternatively, we can capture the nonlinear features of
the options return distribution by also including the gamma effect (the last term).

If the investor only wants to account for the delta component of the option, the return on the
portfolio is:

[7] R P = R B + (1 * )R X

which has a standard error

[8] 2 = 2B + (1 * ) 2 2X + 2 * (1 * ) 2B, X

Assuming that both RB and Rx are normal implies that RP is also normal. The Value at Risk of
this hedged position accounting only for the delta risk of the option is

[9] VaR2 = PV * (1.65) * 2 = USD 20, 698

Intuitively, it can be seen from [8] that when *=1, the FX risk is completely hedged and all that
is left is interest rate risk. On the other hand, *=0 implies there is no hedge and the position is
as if the investor held a foreign bond (see [1]). For values of * between 0 and 1, the VaR of
holding a foreign bond and FX option will be lower than if no option was held.

As previously shown, the portfolios return that accounts for both the delta and gamma effect of
the option is

PX(t) (R X )
1 2
[10] R GP = RB + (1 * ) RX +
2

A consequence of including the term is that R GP s distribution becomes right skewed. To see
how the options delta and gamma components effect the portfolios return distribution, chart 1
presents probability density functions (pdf) for two portfolio return series. One pdf is based only
on the delta component (see [7]), the other is based on both the delta and gamma components
(see [10]).

Chart 1
The effect of incorporating gamma risk on a portfolios return distribution
70

60 delta

50

40
30
20
delta+gamma
10

0
-0.04 -0.02 0 0.02 0.04 0.06
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 8
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

A striking feature from chart 1 is the skewness embedded in the return distribution that includes
the gamma effect. In fact, the distribution (grey line) that only accounts for delta is simply a
scaled version of the normal distribution. Finally, for future use we need to derive the standard
deviation of R GP which is presented below
1
[11] 3 = B2 + (1 * )2 * X2 + 2 * (1 * ) * B,X
2
+ * PX2 (t ) * * X4
2

This expression5 follows from the assumption that RB and RX are normal.

Accounting for the distributional features of R GP


In the presence of gamma risk, normal VaR methodology which relies on the critical values +/-
1.65 will give misleading risk estimates. The reason for this is simple: +/- 1.65 come from the
normal distribution, however, as seen from chart 1, the gamma component of the option causes
the portfolio return distribution to be highly skewed. The inaccuracy of normal VaR is shown in
chart 2 below. We plot R GP s distribution (grey line) and that given by the normal distribution
with a zero mean and a variance equal to 32 (black line).

Chart 2
A comparison of true VaR and standard VaR

60

50
Normal VaR
40
True VaR
30

20

10

0
-0.08 -0.04 0 0.04 0.08
Essentially, by incorporating gamma risk the investor reduces his risk by the difference between
true VaR and normal VaR. The discrepancy between true and normal VaR leads us to search for
methods that augment the standard VaR methodology to account for the skewed return distribu-
tion. In particular, we seek counterparts to the quantiles +/- 1.65 that capture the skewness of
R GP s distribution.

Focusing on analytical solutions, there are basically three approaches we could take to find the
percentiles of R GP s distribution. First, we could match the moments of R GP to a general family
of distributions (Pearson family), second, we could construct the distribution of R GP as a
deformation of a standard normal variables, and, third, we could use the moments of R GP and a
normal analytical approximation to estimate the percentiles of R GP . In this article we describe
how to apply this last method. We find the critical points of R GP s distribution (i.e., the counter-
parts to -/+ 1.65) by applying a formula known as the Cornish-Fisher expansion.
Applications of normal analytical approximations are motivated by the understanding that any
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 9
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

any distribution can be viewed as a function of any other one. For example, the 5th and 95th
percentiles of R GP s distribution denoted cv.05 and cv.95 can be calculated as a function of the
standard normal percentiles z.05 =-1.65 and z.95 =1.65, and R GP s estimated moments. To be
more specific, consider again the normal 90% confidence interval around the mean portfolio
return E[RP]

[12] {
C v = 1.65 P + E(R p ), E(R p ) + 1.65 P }
Under the maintained assumptions, when Rp is no longer normal, that is, when Rp becomes R GP
we can write the approximate confidence interval for E[ R GP ] as

[13]
{[ ] [ ]
CG = E RPG + (1.65 + s.05 ) * , E RPG + (1.65 + s.95 ) * }
= {E[ R ] + (cv
G
P .05 ) * , E [ ] + (cv
RPG .95 ) * }
The main purpose of the correction term s is to adjust for skewness. To a lesser extent it corrects
for higher-order departures from normality. In the case of the normal approximation interval,
s.05=s.95=0. In practice, the Cornish-Fisher expansion allows us to compute the adjusted critical
values cv.05 and cv.95 as a function of the normal critical values z.05 and z.95 directly.6

1 2 1 3 1
[14] cv = z + ( za 1) * 3 + ( z 3z ) * 4 (2 z3 5z ) * 32
6 24 36
where
3=E[( R GP -E[ R GP ])3/3 measures R GP s skewness
4=E[( R GP -E[ R GP ])4/4-3 measures R GP s kurtosis

For example, if we wanted to compute the adjusted percentile cv.05 associated with -1.65, we
would use:

[15]

1 1 1
cv.05 = 1.65 + ((1.65)2 1) * 3 + ((1.65)3 3(1.65)) * 4 (2(1.65)3 5(1.65))32
6 24 36

Under the assumption that returns are normally distributed, 3 and 4 can be written
directly as a function of the variances and covariances of RB and R X. This result is very
useful since multivariate extensions are straightforward and standard VaR calculations
already require a covariance matrix. The measures 3 and 4 depend on the cumulants of R GP
where the first four cumulants of R GP , denoted {1, 2, 3, 4 } are defined as

1 = E[ R GP ]
2 = var( R GP ) = E[( R GP )2 ] E[( R GP )]2
[16]
3 = ( E[ R GP ] E[( R GP )])3
4 = ( E[ R GP ] E[( R GP )]) 4 3 var( R GP )2

6 In this article we present only the first 4 terms of the Cornish-Fisher expression. For a sample size n, this
approximation has an error of order O(n-3/2). For a more complete version, see Johnson and Kotz (1970).
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 10
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

Using , X, BX, , and the cumulants of R GP are 1= 0.745%, 2= 0.0318%,


3=0.000844%, and 4= 0.00000109% and the standardized coefficients7 are 3=1.48 and
4=0.107. Substituting these values into [14], R GP s lower (cv.05) and upper (cv.95) critical
values are -1.176 and 2.029, respectively. Table 1 compares these values to those from the
normal distribution. It is evident that the Cornish-Fisher approximation captures the
skewness of R GP s distribution.

Table 1
Percentiles for normal and Cornish-Fisher approximation

Percentile 5th 95th

Normal -1.650 1.650


Cornish-Fisher approximation -1.176 2.029
Relative difference +28.7% +22.9%

Having calculated the adjusted percentiles, the 90% confidence interval for the expected return
on the portfolio that consists of an OAT and a put option is:

C G = {1.176 P + E(R GP ), E(R GP ) + 2.029 P}

where p = 1.78% and E(R GP ) = 0.745% . Using these results, the VaR of this portfolio is

[17] VaR3 = PV * cv.05 * 3 = USD 18, 285

When applying [15] it is important to remember that this expression is exact only when the true
values of the standardized cumulants are used. In practice, however, we evaluate [14] using
sample estimates of the standardized cumulants. When sample estimates are used to evaluate a
mathematical expression we face what is known as a certainty equivalence problem. Essen-
tially what happens is that the estimation error embedded in the sample estimates is carried over
to the numerical value produced by [14]. Consequently, if there is a lot of estimation error, the
Cornish-Fisher critical values (cvs) will be inaccurate. To determine how estimation error
affects the Cornish-Fisher approximation, we find the critical values of R GP by simulating its
distribution and then finding the 5th and 95th percentiles. Note that this is not the same as full
simulation mentioned earlier because here nothing is revalued. All that is required is that we
generate a matrix of normal random numbers denoted Y and then apply [10].

This partial simulation approach works as follows. Let N denote the number of simulated
random variables and define an Nx2 matrix of independent normal random variablesY=[Y1 Y2]
where Y1 and Y2 are both N x 1 random. Using Y and the covariance matrix of RB and R X
denoted , simulate X=[RB RX] , an Nx2 matrix of correlated normal random variables vectors.8
Defining =[1, 1-] (2x1), =[0,] (2x1) and PX as the spot FRF/USD exchange rate, the
distribution of R GP is generated using the expression:

1
[18] R GP = X * + Px * X 2 *
2

7 Exact formulae for the cumulants are provided in a Technical Appendix that is available from the author upon
request
8 See RiskMetrics Technical document (3rd edition) for details
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 11
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

Denoting the 5th percentile of the standardized distribution of R GP by m.05, VaR under partial
simulation is:

[19] VaR4 = m.05 * 3 = USD 19, 243

Table 2 summarizes the results of this section and presents VaR estimates produced by full
simulation.

Table 2
VaR bands for various methodologies
USD

Confidence
Interval Cornish Partial Full
90% Normal Fisher simulation simulation

Lower 5% (VaR) -20,698 -18,285 -19,243 -19,596


Upper 5% 20,698 31,543 29,789 33,538

The Cornish-Fisher expansion and the partial simulation approach give similar results and both
are an improvement over the normal model (in comparison to full simulation). In full simulation,
the 5th percentile of the profit/loss distribution is USD -4,008. Since the mean of the distribution
is USD 15,588, the adverse price move from the mean (VaR) is USD 19,596.

The expected value of a portfolio with gamma risk


In the previous section we established how accounting for the gamma effect
1 2 * PX(t) * * (R X )2 skews the portfolios return distribution. Another feature of including this
term is that even if it is assumed that the underlying returns have a zero mean
(i.e., E[R B]=E[ RX ]=0), the portfolios expected value, E[ RPG ] , is not necessarily zero since

1
E[R GP ] = * * PX(t) * X2
[20] 2
= 0.745%
or E[ RPG ] = USD 6, 488

Using this as the appropriate mean portfolio return, we can compare the lower and upper bounds
of 90% confidence intervals generated by normal, Cornish-Fisher, partial and full simulation
methods. These bounds are presented in table 3.

Table 3
VaR bands relative to expected portfolio return
Values correspond to VaR + mean portfolio return (in USD)

Confidence
Interval Cornish Partial Full
90% Normal Fisher simulation simulation

Lower 5% -14,210 -11,797 -12,755 -4,008


Upper 5% 27,186 38,031 36,277 49,126
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 12
Peter Zangari (1-212) 648-8641
zangari_peter@jpmorgan.com

Finally, recall that the coverage cost of USD 870,994 is USD 8,289. Since this is a sunk cost,
when computing the confidence bands it should be subtracted from the portfolios expected
return. Table 4 presents confidence bands which are adjusted for the both the portfolios
expected return and the options cost.

Table 4
Confidence bands relative to expected portfolio return and option cost
values correspond to VaR + mean portfolio return - option cost (in USD)

Confidence
Interval Cornish Partial Full
90% Normal Fisher simulation simulation

Lower 5% -22,499 -20,036 -21,044 -12,297


Upper 5% 35,475 46,320 44,566 40,837

Conclusion
This article describes two alternative methodologies to estimate VaR on portfolios that include
options when accounting for gamma risk. The Cornish-Fisher expansion provides an analytical
approximation to the percentiles of a portfolios true return distribution. In VaR estimation,
these percentiles are used in place of their normal counterparts +/- 1.65. Based on a synthetic
portfolio that consists of a French government bond (OAT) and a foreign exchange option, this
approximation offers an improvement over normal VaR estimates. However, in practice, the
Cornish-Fisher expression may yield inaccurate results because it is evaluated at sample
estimates of skewness and kurtosis rather than at their true values. To address this issue, a
partial simulation approach is suggested that requires the simulation of correlated multivariate
normal random variates. These variates are then transformed into the portfolios return distribu-
tion from which the appropriate percentiles are found. While partial simulation does not require
the calculation of sample estimates, its main drawback is that the percentiles it produces are
subject to simulation error. Ultimately, evaluating the performance of these adjustments is an
empirical issue. This requires estimating VaR on portfolios of different size and composition.
Those interested in such studies as well as the technical details of this paper including exten-
sions to larger portfolios should contact the author using the number (e-mail address) listed
above.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 13
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

RiskMetrics Excel Add-In


Many RiskMetrics users who wanted to incorporate the datasets into Excel spreadsheets
have often had to find convoluted ways to make use of the data because the correlation files
are so large (i.e., over three MB and 100,000 rows each).

This new Excel Add-In provides ready access to the RiskMetrics data and allows individuals
to customize the calculation for only those instruments in which positions are held. This section
outlines the necessary spreadsheet formulas and macro commands to utilize the Add-In. It also
provides potential users with a detailed example.

It is important to remember several rules when using the Add-In:


The file and instrument names parameters are case sensitive. Filename is not the same
as filename even though both are legitimate in and of themselves as file names.
The volatility and correlation files must have the same prefix, e.g., rm2dly. In addition
their suffixes must be .vol and .cor respectively.
All instrument names should be entered in upper case; AUD.XS is correct. Aud.XS is
not.
The Add-In function always looks to the current working directory for the datasets. It may
be necessary to include the full path when entering the parameter for the datasets.

Setting up
The new data sets can be downloaded from the Internet at URL:

http://www.jpmorgan.com//MarketDataInd/RiskMetrics/download-data.html

or directly by ftping to:

ftp://ftp.jpmorgan.com/pub/RiskMetrics/

The first step is to create a macro like the one shown below that clears the memory of any
previously loaded RiskMetrics matrices and loads the one you specified.

Sample Macro to load RiskMetrics data

JPMVAR.MACRO macro name


=JPMVAR(ERR_LOG,1) Turn error logging on
=JPMVAR(VAR_TS_FREE_MATRIX,rm2dly) clears matrix from memory,e.g.,rm2dly
=JPMVAR(VAR_TS_LOAD_MATRIX,rm2dly,A,list) loads specified matrix
=RETURN()

Note that the volatility and correlation file name prefix is included in the second and third
command.

The last parameter passed in the VAR_TS_LOAD_MATRIX command, i.e., list, refers to the
list of the instrument names you wish to load. This can include from one to all of the
RiskMetrics instruments. This list can be a reference to a range in a spreadsheet or macro file
or a separate text file.

Shown below is a sample list of instruments. Instrument names used by the Add-In are case
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 14
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

sensitive, i.e., they must all be in


N O P
UPPER CASE. Assume cells from
1
O2 to O9 represent the instruments
you are interested in. This range has 2 AUD.XS
been named Instru_list. This range 3 AUD.SO2
name can be used, in quotes, as one 4 AUD.Z02
of the parameters for the Add-In 5 BEF.S02
functions, e.g., list in the third 6 BEF.Z02
macro line shown above. 7 BEF.XS
8 CAD.XS
9 CHF.XS
Example
For this example we suppose you are USD based and have the following positions (expressed in
USD equivalents):
FRF 55 million of 3-year swap
GBP 25 million in 7-year government zero
GBP -80 million in a 5-year swap.

Assume the daily dataset for December 15, 1995 (rm2dly.sit) has been downloaded, decom-
pressed, and you have renamed the two files it contains to have the same prefix.
Volatility file, dv121595.vol has been renamed to rm2dly.vol
Correlation file, dc121595.cor has been renamed to rm2dly.cor

Open or load the Add-In file. (Refer to appendix for platform specifics).

Next, open a spreadsheet that could look like the one pictured below. The order of the positions
is not important, e.g., GBP.S05 could have been listed first or last. Note that because you are
USD based you have foreign exchange risk as well as interest rate risk. The position and
instrument code columns can be reversed provided the parameters in the function call are
referenced to the appropriate cell.

A B C D
1
2 Market value
3 Position Instrument DEaR Volatility
4 -80 GBP.S05 30.1594 0.37699
5 55 FRF.S03 20.9803 0.38146
6 25 GBP.Z07 15.2091 0.60837
7 55 FRF.XS 44.1451 0.80264
8 -55 GBP.XS 15.2519 0.61008
9 Diversification effect 70.0060
1 0 Total VaR 55.7398

The formula that would be entered in C4 for DEaR of the GBP 5-year swap position:
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 15
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

=JPMVAR(VAR_TS_CALC, data file, position reference, instrument reference)

or

=JPMVAR(VAR_TS_CALC,rm2dly,A4, B4)

The formulas in cells C5 to C7 function similarly.

Note that the file name is entered with double quotes. Reference can also be made to a
specific or defined name cell that contains the file prefix, e.g., rm2dly. This will simplify
copying and pasting.

The formula in cell C10 shows the total diversified DEaR estimate. In its formula, the
positions and instrument names are now referenced as arrays.

=JPMVAR(VAR_TS_CALC,rm2dly,A4:A8, B4:B8)

Cell C9 is the diversification effect. It is equal to the sum of the individual DEaRs in cells
C4 to C8 less the total DEaR in cell C10.

Now lets turn to individual volatilities. The 1-day volatility of the DEM 5-year swap as
shown in cell D4 is returned by the formula;

=JPMVAR(VAR_TS_VOLS,rm2dly,B4)

What are the correlations between the instruments? Shown below is an example as to how
correlation data can be retrieved. It can be listed anywhere on the spreadsheet. To return the
correlation between two instruments you enter:

=JPMVAR(VAR_TS_CORR,rm2dly, Instrument 1, Instrument 2)

So the formula to return the correlation of the 3-year FRF swap to the 5-year GBP swap
would be:

=JPMVAR(VAR_TS_CORR,rm2dly,B5, B4)

This is a sample of how you can view of correlations.

J K L
1 Correlations
2 Instrument 1 Instrument 2 Value
3 DEM.S05 FRF.S03 0.02784
4 DEM.S05 GBP.Z07 0.66728
5 DEM.S05 FRF.XS 0.34253
6 DEM.S05 GBP.XS 0.02825
7 FRF.S03 GBP.Z07 0.40524
8 FRF.S03 FRF.XS -0.25479
9 FRF.S03 GBP.XS -0.15662
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 16
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

Appendix
Loading the Add-In
PC (Windows)
Open the JPMVAR.XLL file from the File menu or
Add JPMVAR.XLL to the Add-In Manager list of Add-Ins

MacIntosh
Double-click on the JPMVAR icon to start Excel
Open the JPMVAR file from the File menu
Add JPMVAR to the Add-In Manager list of Add-Ins.

Add-In Verification
You can verify that the Add-In has been properly loaded by selecting a cell on a spreadsheet
and typing:

=JPMVAR(VERSION)

This will return JPMVAR Add-In Version 6.00 if the Add-In is loaded.

Unloading the Add-in


PC (Windows) - UNREGISTER(JPMVAR.XLL)

MacIntosh - UNREGISTER(JPMVAR)

If the Add-In was loaded by adding it to the Add-In Manager list, it can be unloaded by
removing it from the list.

Add-In function call general syntax


= JPMVAR(Add-in Function Name, Pararmeter 1, , Parameter N)

Sample Formulas

=JPMVAR(VAR_TS_VOL,rm2dly,AUD.XS) for volatility or

=JPMVAR(VAR_TS_CORR,rm2dly,AUD.XS,DEM.XS) for correlation

Errors
Errors conditions are detected and recorded in a file called error.log. When unexplained
errors occur, users should ensure that error logging is ON and examine the error.log file. Its
location is:

PC(Windows) - C:\ root directory

MacIntosh - desktop

Errors can also be returned by using the Error_get_log function (see below).
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 17
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

Analytics
The VaR calculation works in two steps. First it takes the position array and converts it into an
intermediate position risk array using the position vector and the respective price volatility for
each instrument:

PositionRiskArray=Position Array * Volatility Vector

Next the routine computes Value at Risk.

VaR = [ positionRiskArray]T *[correlationMatrix]*[ positionRiskArray]


T=Transpose

Excel Size Limitation


Ranges must contain fewer than 4,000 cells
Text ranges must contain fewer than 255 cells.

Add-In Functions
VAR _TS_FREE_MATRIX

Frees from memory the specified volatility and correlation matrix.

Input Parameters Valid Input

1 Prefix of volatility and correlation files.[test] Valid prefix


They must be the same. The routine automatically
add the default extension (.vol & .cor). May need
to include path.
Return Value: Status[integer]

VAR_TS_LOAD_MATRIX

This loads the RiskMetrics dataset file into memory. This function must be called prior to
calling VAR_TS_CALC. It should only be called once. When this function loads a matrix, the
instrument names are matched against names in the volatility matrix/vector and only names that
match are read into memory. Only if you want all the instruments will the entire 1.6 MB of the
correlation matrix be read into memory.

=JPMVAR(VAR_TS_LOAD_MATRIX,rm2dly,A,Reference to List)

Input Parameters Valid Input

1 Prefix of volatility and correlation files.[text] Valid file prefis


They must be the same. The routine automatically
adds the default extension (.vol & .cor). May need
to include full path.
2 Source of instrument names. It is strongly recommended (A)rray or (F)ile
that the A, parameter be used to indicate that the
names are contained in a spreadsheet.array.
3 Reference to list/array of Instrument names. N/A

Return Value: Status[integer]


New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 18
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

VAR_TS_CALC

Returns the RiskMetrics DEaR estimate for the single or set of positions based upon the
instrument defined amount..

=JPMVAR(VAR_TS_CALC,rm2dly,Range 1,Range 2)

Input Parameters Valid Input

1 Prefix of volatility and correlation files.[text] They must Valid file prefix
be the same. The routine automatically add the default
extension (.vol & .cor). May need to include full path.
2 Position array. [real number array] N/A
3 Names or range array N/A
Return Value: Value at Risk [real number]

Note: When entering in the formula as an array you must press the appropriate keys to have the
input recognized as an array; see below. Also range 1 and range 2 must have the same number
of rows or columns. Output is one VaR per row/column pair.

PC (Windows) - Control+Shift+Enter
MacIntosh - Command+Enter
(Use the Enter key and not the Return key)

VAR_TS_VOL

This routine returns the volatility of a given instrument, e.g. Australian dollar against the
U.S. Dollar (AUD.XS) or the five year U.S. government zero rate (USD.Z05). Each volatility
represents 1.65 standard deviations. The matrix must already be loaded in memory with the
VR_TS_LOAD_MATRIX function. The instrument name argument is matched to an instru-
ment name associated with the volatility vector in memory.

=JPMVAR(VAR_TS_VOL,rm2dly,A2)

Input Parameters Valid Input

1 Prefix of volatility and correlation files.[text]. They must Valid file prefix
be the same. The routine automatically adds the default
extension (.vol & .cor). May need to include full path.
2 Name of instrument [text] Valid instrument name
Return Value: volatility [real number]

Errors:
Time series not found.
Specified matrix files not found

VAR_TS_CORR

This routine returns the correlation between two given time series. The matrix must already
be loaded in memory with the VAR_TS_LOAD_MATRIX function. The time series names
arguments are matched to time series names associated with the correlation matrix in memory.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 19
Scott Howard(1-212) 648-4317
howard_james_s@jpmorgan.com

=JPMVAR(VAR_TS_CORR,rm2dly,Reference 1, Reference 2)

Input Parameters Valid Input

1 Prefix of volatility and correlation files.[text]. They must Valid file prefix
be the same. The routine automatically adds the default
extension (.vol & .cor). May need to include full path.
2 Name of first instrument Valid instrument name
3 Name of second instrument Valid instrument name
Return value: Correlation [real number].

Errors:
Time series not found.
Specified matrix files not found.

ERR_LOG

This routine turns error logging on and off (the default is off).

=JPMVAR(ERR_LOG,1)

Input Parameters Valid Input

1 Integer representing on or off state 1 is On


0 is Off

ERR_GET_LOG

This routine returns the last messages in the error.log file, up to 20 messages. The ERR_LOG
must be turned on before this routine is used. Output is refreshed when the function is
recalculated. You MUST force recalculation by editing the formula or via macro logic.

=JPMVAR(ERR_GET_LOG)

There are no input parameters.


New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 20
John Matero(1-212) 648-8146
matero_john@jpmorgan.com

Practical solution for correlations from nonsynchronous data


In the third quarter 1995 edition of the RiskMetrics Monitor, we outlined a methodology
to adjust correlations from nonsynchronous data. Since then, we have conducted a signifi-
cant number of tests to verify the feasibility of adjusting a large set of time series as well as
the reasonableness of our technique.

First, we reiterate the methodology to adjust correlation from nonsynchronous data. The
following algorithm explains how the correlation matrix is adjusted when the underlying
return series are nonsynchronous.

1) Calculate the unadjusted RiskMetrics covariance matrix, R. (R is an N-dimensional


square matrix and it must be positive definite).

2) Compute the nonsynchronous data adjustment matrix K where the elements of K are:

Cov(rk,t , rj,t 1 ) + Cov(rk,t


obs obs obs obs
1 , rj,t ) for k j
kk, j =
0 for k = j

3) Calculate the eigenvalues of the matrix KR-1. Denote these eigenvalues by di for i=1,2,...,N.

4) Select the largest allowable correction factor where

1
0= , 1
min di
is an arbitrarily small number.

5) Form the corrected covariance matrix M such that M=R+*K and its associated
correlation matrix Mcorr.

6) Check to make sure the following two conditions are satisfied:

i. Mcorr is positive definite.


ii. Mcorr does not contain any elements are larger than one in absolute value.

7) If (i) or (ii) is not satisfied, reduce and repeat steps 5 and 6. Otherwise keep Mcorr as
the new correlation matrix.

The time at which a price or yield is recorded determines whether or not a time series will be
included in the adjustment process. If a pair of series are recorded at times that differ by
eight hours or more, then the resulting correlation estimate was adjusted. In summary, the
following instruments have been included in the process.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 21
John Matero(1-212) 648-8146
matero_john@jpmorgan.com

Asset Class Market Maturities

Money market HKD, JPY, SGD All


Government bonds AUD, JPY, NZD All
Interest rate swap HKD, NZD, SGD All
Equity AUD, HKD, JPY, NZD, SGD All

Refer to the RiskMetrics Technical Document (Section D) for the schedules of times.

Recall that the algorithm requires the covariance matrix to be an n-dimensional square matrix
and positive definite. We synchronized matrices of varying size, ranging from 2x2 to 100x100,
and checked the reasonableness of the results. Reasonable was defined with respect to the
original correlations an unreasonable result would be one whose synchronized correlation
series was markedly more noisy than the original. Incidentally, this noise may be due to the
computers imprecision and not from estimation. In the end, we determined that a square matrix
of order 2 produced the most satisfactory adjusted correlation estimates.

Further, note that the algorithm for the corrected covariance matrix, M, was given as
M=R+*K. Also note that the unadjusted (or, current, RiskMetrics) covariance matrix, R, is
estimated as

2 current, t = 1 t21 + (1 1 ) Xt Yt where 1 = 0.94

and elements of the the adjusted covariance matrix, K, are estimated as

2 adjusted, t = 2 t21 + (1 2 ) Xt Yt where 2 = 0.98

The new elements of the final matrix are then 2 new,t = current,t
2
+ adjusted,t
2
.
By decrementing by f in - 0.0001 steps we arrived at the most reasonable results and limited the
computational costs.

We based our experiments and observations presented in this section on the RiskMetrics daily
horizon estimates. In the fourth quarter 1995 edition of the RiskMetrics Monitor, we outlined
an alternative volatility forecasting method for the RiskMetrics monthly horizon estimates.
Denoted as alternative RiskMetrics (or Alt R in the charts and tables), this new method allow
us to apply the same techniques to adjust the monthly correlation estimates as well.
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 22
Jacques Longerstaey (1-212) 648-4936
riskmetrics@jpmorgan.com
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 23
Jacques Longerstaey (1-212) 648-4936
riskmetrics@jpmorgan.com
New York Morgan Guaranty Trust Company RiskMetrics Monitor
January 23, 1996 Risk Management Services page 24
Jacques Longerstaey (1-212) 648-4936
riskmetrics@jpmorgan.com

RiskMetrics products Worldwide RiskMetrics contacts

Introduction to RiskMetrics: A eight-page document For more information about RiskMetrics, please contact
which broadly describes the RiskMetrics methodology the author or any person listed below:
for measuring market risks. North America
New York Jacques Longerstaey (1-212) 648-4936
RiskMetrics Directory: Available exclusively on-line, a
longerstaey_j@jpmorgan.com
list of consulting practices and software products that
incorporate the RiskMetrics methodology and datasets. Chicago Michael Moore (1-312) 541-3511
moore_mike@jpmorgan.com
RiskMetrics Monitor: A quarterly publication which Mexico Beatrice Sibblies (52-5) 540-9554
discusses broad market risk management issues, statistical sibblies_beatrice@jpmorgan.com
questions as well as new software products built by third- San Francisco Paul Schoffelen (1-415) 954-3240
party vendors to support RiskMetrics. schoffelen_paul@jpmorgan.com
Toronto Dawn Desjardins (1-416) 981-9264
RiskMetrics datasets: Two sets of daily estimates of
desjardins_dawn@jpmorgan.com
future volatilities and correlations of approximately 450
rates and prices each a total of 100,000+ datapoints. One Europe
set is to compute short-term trading risks, the other for London Benny Cheung (44-71) 325-4210
medium-term investment risks. Datasets currently cover cheung_benny@jpmorgan.com
Foreign Exchange, Government Bond, Swap, and Equity
Brussels Geert Ceuppens (32-2) 508-8522
markets in up to 22 currencies. Eleven commodities are also
ceuppens_g@jpmorgan.com
included. A RiskMetrics Regulatory dataset which
incorporates the latest recommendations from the Basel Paris Ciaran OHagan (33-1) 4015-4058
Committee on the use of internal models to measure market ohagan_c@jpmorgan.com
risk is now available. Frankfurt Robert Bierich (49-69) 712-4331
bierich_r@jpmorgan.com
Bond Index Cash Flow Maps: A monthly insert into the Milan Roberto Fumagalli (39-2) 774-4230
Government Bond Index Monitor outlining synthetic cash fumagalli_r@jpmorgan.com
flow maps of J.P. Morgans bond indices.
Madrid Jose Luis Albert (34-1) 577-1722
albert_j-l@jpmorgan.com
Trouble accessing the Internet? If you encounter any
difficulties in either accessing the J.P. Morgan home page Zurich Viktor Tschirky (41-1) 206-8686
on http://www.jpmorgan.com or downloading the tschirky_v@jpmorgan.com
RiskMetrics data files, you can call 1-800-JPM-INET in Asia
the United States.
Singapore Michael Wilson (65) 326-9901
wilson_mike@jpmorgan.com
Tokyo Yuri Nagai (81-3) 5573-1168
nagai_y@jpmorgan.com
Hong Kong Martin Matsui (85-2) 973-5480
matsui_martin@jpmorgan.com
Australia Debra Robertson (61-2) 551-6200
robertson_d@jpmorgan.com

RiskMetrics is based on, but differs significantly from, the market risk management systems developed by J.P. Morgan for its own use. J.P. Morgan does not
warrant any results obtained from use of the RiskMetrics data, methodology, documentation or any information derived from the data (collectively the Data)
and does not guarantee its sequence, timeliness, accuracy, completeness or continued availability. The Data is calculated on the basis of historical observations
and should not be relied upon to predict future market movements. The Data is meant to be used with systems developed by third parties. J.P. Morgan does not
guarantee the accuracy or quality of such systems.
Additional information is available upon request. Information herein is believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and
are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan may
hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as advisor or lender to such issuer. Morgan Guaranty Trust Company is a member of FDIC and SFA. Copyright
1996 J.P. Morgan & Co. Incorporated. Clients should contact analysts at and execute transactions through a J.P. Morgan entity in their home jurisdiction unless governing law permits otherwise.