Extreme Loss rate considers the losses that could occur outside the coverage of VaR.
The Extreme loss margin for a stock is the higher of the following
· 1.5 times the standard deviation of daily LN returns of the stock price in the last six months i.e. 1.5 times Volatilty in the last 6 months.
· 5% of the value of the position (Buy or Sell)
Extreme Loss rate considers wider range of price values (6 months’ prices). The minimum value for this margin is 5% for any stock.
This margin rate is fixed at the beginning of every month, by taking the price data on a rolling basis for the past six months.ADVERTISEMENTS