Undiversified VaR: Take the sum of the VaR(x) of each individual risk factor.
Diversified VaR: Take the VaR(x) of the joint cumulative distribution function of multiple risk factors.

Based on my tests recently: there are very obvious signs that returns are randomly distributed and attempting to predict stocks and their derivatives is useless. Though there are several ways to outperform the market through exploiting mispricings..  Not sure if I'm saying anything new here though ...

Can you convert the effective annual yield into a nominal bond yield and feed that into the excel yield formula?  For example, if the quoted yield on an annual effective basis is 5.0625%, use the formula:

2*{[(1+.050625)^.5]-1} = 5%

Then use 5% in Excel's yield formula.

Tedypendah: ALM at an Insurance company is easy... I guess I didn't get the memo! normally you will look at the profile of the liabilities, maturities etc But for guaranteed products there is a special method of calculating the reserves using an Economic Scenario Generator. The value of this is the...

My company operates primarily in the "fixed indexed products" space, which links the payoff of the policy to performance of an equity index, and guarantees a return of premium.  This link describes in more detail: http://www.annuityfyi.com/fixed-indexed-annuities/what-is-fixed-indexed/ In ...

I am an actuary in ALM at a US insurance company.  I am relatively new to ALM and am admittedly much more comfortable & familiar with the liability side of the balance sheet than the asset side. My question is:  I can replicate the payoff of my liability with a portfolio of corporate bonds and ...

I am curious how you can do Monte Carlo simulation of an option without simulating the underlying?

Check out "How to Implement Market Models Using VBA" by Francois Goosens.  The book isn't perfect, but I've found it helpful in implementing a few interest rate models:

http://www.wiley.com/WileyCDA/WileyTitl ... 62001.html

Assuming that BS presents really right price the next questions seem relevant.  1. Whether or not buying an option and hedged it by using delta hedge as it was suggested by B&S we could not make profit.  2. If our experience shows that volatility of underlying sigma which we know based on stock...

You're thinking like we should plug historical volatility into Black Scholes Formula to get a price based on historical volatility, and that should be used as the basis of price comparisons. But historical data often differs from the market's expectation and pricing.  So you can't blindly apply it a...

USD swaps vs treasuries.

For US practitioners, which is better for discounting a set of cash flows and why?

I have a 20-year insurance liability and want to calculate the market consistent value of the liability.

I shouldn't have entertained your whims and I will stop after this post. 

And really, why do you want to make things complicated from the very beginning?
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We've all been there. It's a rite of passage.

list1 posts always make for an entertaining read.

Thanks for the feedback.  I agree it makes sense to keep the coupon rate as is, and discount future cash flows at the risk-free rate.  I don't understand why the MCEV guidance doesn't mandate that approach. By the way, I am not actually trying to calculate MCEV... my primary objective is the MVL.  I...

I work for an insurer and need to calculate a fair value or market value of liabilities.  One of the challenges in this calculation has been in figuring out how to handle cash flows on products that are credited interest based on the book yield of the underlying asset portfolio. There is little guid...

<r>QuoteOriginally posted by: list1Thank you bearish, Cuchulainn I am curious because never thought about different specific models of the short rate. In Gaussian two factor (G2++) model similarly assumes that short rate is driven by two stochastic factors plus a deterministic shift function derived...