This Technical Document provides a detailed description of RiskMetrics, a set of techniques and data to measure market risks in portfolios of fixed income instruments, equities, foreign exchange, commodities, and their derivatives issued in over 30 countries. This edition has been expanded significantly from the previous release issued in May 1995.

• We are interested in promoting greater transparency of market risks. Transparency is the key to effective risk management.
• Our aim has been to establish a benchmark for market risk measurement. The absence of a common point of reference for market risks makes it difficult to compare different approaches to and measures of market risks. Risks are comparable only when they are measured with the same yardstick.
• We intend to provide our clients with sound advice, including advice on managing their market risks. We describe the RiskMetrics methodology as an aid to clients in understanding and evaluating that advice.

Both J.P. Morgan and Reuters are committed to further the development of RiskMetrics as a fully transparent set of risk measurement methods. We look forward to continued feedback on how to maintain the quality that has made RiskMetrics the benchmark for measuring market risk. RiskMetrics is based on, but differs significantly from, the risk measurement methodology developed by J.P. Morgan for the measurement, management, and control of market risks in its trading, arbitrage, and own investment account activities. We remind our readers that no amount of sophisticated analytics will replace experience and professional judgment in managing risks. RiskMetrics is nothing more than a high-quality tool for the professional risk manager involved in the financial markets and is not a guarantee of specific results.

• J.P. Morgan and Reuters have teamed up to enhance RiskMetrics . Morgan will continue to be responsible for enhancing the methods outlined in this document, while Reuters will control the production and distribution of the RiskMetrics data sets.
• Expanded sections on methodology outline enhanced analytical solutions for dealing with nonlinear options risks and introduce methods on how to account for non-normal distributions.
• Enclosed diskette contains many examples used in this document. It allows readers to experiment with our risk measurement techniques.
• All publications and daily data sets are available free of charge on J.P. Morgan's Web page on the Internet. This page is accessible directly or through third party services such as CompuServe or America Online.