Historical Simulation VaR – Easy Guide

Historical Simulation VaR The Historical Simulation VaR approach is the third approach to value at risk and quite a popular approach in banking institutions along with Monte Carlo. The main point here to remember is that the historical simulation does not make any...

Monte Carlo VaR

Monte Carlo  VaR Given the limitations of the Analytic risk model we can look at other approaches to Value at risk. A very natural approach to consider is using a Monte Carlo VaR Simulation. Monte Carlo simulation will be able to cope with stochastic jumps and...

Analytical VaR

This method is used mainly for linear products – spot and futures products. Linear VAR cannot be used to quantify the risk of derivatives as the model cannot take into account higher order risks such as gamma and vega. This method is also referred to as the...

Value at Risk Models

Market risk as we have already looked at arises from positions that are mismatched. Even brokers who in theory act as middlemen and should not have market risk will end up holding risky positions during the course of trading and market making. A broker may also put on...