FRM® glossary: P
9 terms beginning with P.
- Parametric VaR
- VaR computed from an assumed distribution, usually normal, using the portfolio's standard deviation. It is quick but understates risk when returns have fat tails or the positions are non-linear. Where it appears →
- Pillar 2
- The part of Basel capital rules under which supervisors review a bank's own risk assessment and can require extra capital. It covers risks that Pillar 1 does not. Where it appears →
- Potential future exposure
- A high-quantile estimate of the exposure to a counterparty at some future date. It is used to set limits. Where it appears →
- Prepayment risk
- The risk that borrowers repay a loan early, usually when rates fall, changing the investor's cash flows. It shortens the life of mortgage securities when reinvestment is least attractive. Where it appears →
- Present value
- The value today of a future cash flow, found by discounting at a suitable rate. It is the basis of bond, swap and derivative pricing. Where it appears →
- Principal components analysis
- A technique that reduces many correlated variables to a few uncorrelated factors that explain most of their variation. For yield curves, the first three are level, slope and curvature. Where it appears →
- Probability of default
- The likelihood that a borrower will fail to pay within a stated period, usually a year. It is one of the three inputs to expected loss. Where it appears →
- Procyclicality
- The tendency of rules or behaviour to amplify the economic cycle, for example by tightening credit in a downturn. Capital and margin rules can have this effect. Where it appears →
- Put-call parity
- The relationship between the prices of a European call, a European put, the underlying and a bond for the same strike and expiry. A breach would allow arbitrage. Where it appears →
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