Overview

The VaR Settings form allows the customization of parameters crucial for VaR Calculation.
These include:

Confidence level
Holding days
Deal filter for portfolio to be assessed
Variance/Covariance type (for Parametric method)
Simulation number and PCA precision percent (for Monte Carlo Simulation method,
among others)

Ensuring the proper configuration of this form is vital for the accurate execution of Value at
Risk (VaR) analysis.

VaR Settings Form Example

Column Names
1. ID

System generated ID for the VaR Settings

2. Name

Selections: User Input (Free Form Text)

 Explanation: Name of the VaR Setting

3. Deal Filter

Selections: Drop-down menu to choose from all “Deal Filters” in the system.
Explanation: Specifies the data or set of deals for VaR analysis, options include:
All deals in the system
Entire Legal Entity
All Business Units
Some Business Units
All Portfolios
Some Portfolios
Deal Types
Deal Numbers
Traders
Note: Official VaR needs to be run on all the books.

4. Variance Covariance

Selections: Drop-down menu to choose from all “Variance Covariance Settings” in

the system.
Explanation: Variance Covariance Matrix is needed for the calculation of Parametric
and Monte Carlo VaR.

5. Holding Days

Selections: User Input (Free Form Text)

Explanation: Input the number of days to hold the position; the most used option is
1-Day.

6. Confidence Level

Selections: User Input (Free Form Text)

Explanation: Specify the confidence level for VaR; the most used option is 95% or
0.95.

7. Calc Parametric VaR?

Selections:
Checked – Calculate Parametric VaR
Unchecked – Do not calculate Parametric VaR

8. Calc Monte Carlo VaR?

 Selections:
Checked – Calculate Monte Carlo VaR
Unchecked – Do not calculate Monte Carlo VaR

9. Monte Carlo Simulations

Selections: User Input (Free Form Text)

Explanation: Defines the number of correlated random price shocks that need to
be computed for the calculation of Monte Carlo VaR. The higher the number of
simulations, the better the result is. However, the higher number of simulations
means that more computational power is needed.

10. PCA Precision

Selections: User Input (Free Form Text)

Explanation: The precision for Principal Component Analysis. The PCA precision,
which the user is allowed to define, is the threshold for defining principal
components. For example, if the PCA precision is 95%, the risk factors, which
contribute 95% variance, are considered principal components.

11. Option Valuation Method

Selections: Delta Gamma Approximation

Explanation: Indicates the utilization of the Delta Gamma Approximation for
computing PnL for all option deals.

12. Calc Historical VaR?

Selections:
Checked – Calculate Historical VaR
Unchecked – Do not calculate Historical VaR

13. Historical VaR Look Back Days

Selections: User Input (Free Form Text)

Explanation: Defines number of good business days to retrospectively consider for
loading prices in the Historical VaR calculation.

14. Historical VaR Lambda

Selections: User Input (Free Form Text)

Explanation:
If Historical VaR Lambda = 1; then all Historical Prices are treated with equal
weights.
 If Historical VaR Lambda < 1; then the most recent Historical Price is given the
maximum weight, with decreasing weights as we move back in the historical
window.

15. Report Conditional VaR?

Selections:
Checked – Calculate and Report Conditional VaR
Unchecked – Do not calculate and Report Conditional VaR
Explanation:
Conditional VaR represents the average of PnL values exceeding VaR in the
PnL Distribution.

16. Report Curve VaR?

Selections:
Checked – Calculate and Report VaR at Curve Level
Unchecked – Do not calculate and Report VaR at Curve Level
Explanation:
Provides the VaR number at Curve levels.

17. Reporting Currency

Selections: Drop-down menu to choose from all available currencies in the system.
Explanation: Specifies the currency used for reporting the VaR number.

18. Drill Down Attributes

Selections: Drop-down menu to choose from various options such as Book, Trader,
etc.
Explanation: Provides the capability to compute VaR at Book Level or Trader Level.

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