Hi ,I have the following practical questions about Bond Option Historical VaR;1-If we use Historical VaR model ,how can we generate historical bond price,like if we have a bond and bond issued two weeks ago but I haven't 252 historical spot bond price to generate forward price,so how can I generate this data for Eurobonds or ZC Bonds,2-In terminology forward price differs for Coupon Bonds and ZC ,but there is no detail for Coupon Bonds like if option writed between two coupon or an option has two coupon for maturity,any practice or article?Thanks.Best Regards.

the bond price is a function of its duration and the volatility of the yield curveyou can get a var estimate by using the current duration and multiplying with your expected yield vol. then you dont need history...which is a bad idea to begin with (bonds are not like stocks)

Hi Gmike2000,thanks replying,I think,If we price option duration based model like Schaefer & Schwartz (1987) model you're right,I mean using Black-76 model,can we use same approach ,any paper about this?

Hello,I think for very short horizons, which is what VaR usually assumes, you can use a simple approach such as the one I described below if you own a bond.I am not sure you need to use an option model if you own an option. Assume you own an option on a bond. Then this option would be equivalent to holding a delta position in the underlying bond. For example, if your bond has 50k duration dollar risk, and your option has a delta of .1, then your have 5k duration dollar risk via your option. You can multiply this with your expected yield change (estimated from historical times series of constant maturity yields that match your bond, or derived by whatever means you see fit). You can make it more "precise" by incorporating 2nd order effects via your option gamma. Again, this "works" only for very short horizons (1-10 days max). I put "works" in quotes, because that is actually a word that should not be used when talking about VaR (because VaR does not work).CheersMike