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Options VaR
Hi.Can we calculate Options VaR by Monte Carlo Simulation?What is the differences of VaR approach between Parametric Options VaR,Historical Options VaR and Monte Carlo Options VaR.Because Options has greeks and calculated any day,but Options VaR is not easy I think.And Delta-Gamma Approach is not enough.Anyone who know any book,lecture or example for these subjects.Thanks everyone.
Options VaR
you can compute option VaR by partial or full Monte Carlo simulation, one of the shortcomings of Monte Carlo compared to Parametric is it is time-comsuming, especially for exotic options portfolio; the most commonly used Parametric method is Cornish-Fisher. search 'Delta-Gamma four ways'.
Options VaR
make sure you add some big random jumps to your simulation (well at least if you want to use it in practice)
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- BobJefferson
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Options VaR
And also be aware that in some situations a parametric delta-gamma approach is not going to work. Suppose you made a volatility trade (straddle), your VaR risk will be underestimated. My preferred approach is a multivariate Monte Carlo simulation simulating the spot underlying (capturing delta and gamma risk) and the volatility surface (delta/time vertices) in order to caputure Vega/Smile/Skew Risk. Read carefully 'Delta-Gamma four ways' because, if I´m not wrong, they mention some problematic situations using Cornish-Fisher approximation.Best regards
Options VaR
Is there any discussion forum/Link for the 'Delta-Gamma four ways'? I could not get the link of you are referring to... Thanks.
Last edited by edelweiss on January 3rd, 2007, 11:00 pm, edited 1 time in total.
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- BobJefferson
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Options VaR
edelweiss This paper Delta Gamma 4 ways is avaiable in the RiskMetrics website or try to search in Google.Regards
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- logfinance
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Options VaR
Here you go:http://ssrn.com/abstract=2317429 This is a recent and new methodology on VaR and ES computation under the delta-gamma approach.