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Value-at-Risk
Value-at-Risk
Value-at-Risk
Chapter 18
Options, Futures, and Other Derivatives 6th Edition, Copyright John C. Hull 2005
18.1
18.2
Regulators
18.3
18.4
Advantages of VaR
It
18.5
Time Horizon
18.6
Historical Simulation
(See Tables 18.1 and 18.2, page 438-439))
18.7
vi
vm
vi 1
Options, Futures, and Other Derivatives 6th Edition,
18.8
18.9
Daily Volatilities
In
year
252
200,000 10 $632,456
50,000 10 $158,144
The VaR is
158,114 2.33 $368,405
Options, Futures, and Other Derivatives 6th Edition, 18.15
Portfolio
Now
S.D. of Portfolio
A
In
The
P i xi
i 1
n
P2 i j i j ij
i 1 j 1
n
P2 i2 i2 2 i j i j ij
i 1
i j
Example continued
We
10,000
6,540
6.5
1.0675
Options, Futures, and Other Derivatives 6th Edition, 18.22
Example continued
We
Example continued
Suppose
gives =0.074
Example continued
The value of 6,540 received in 6.5
years
6,540 0.074 $484
in 5 years6,and
540 by
0.926 $6,056
in 7 years.
This cash flow mapping preserves
value and variance
Options, Futures, and Other Derivatives 6th Edition, 18.25
of stocks
Portfolio of bonds
Forward contract on foreign currency
Interest-rate swap
and
S
x
S
Options, Futures, and Other Derivatives 6th Edition, 18.27
As an approximation
P S S x
P Si i xi
i
Example
Consider an investment in options on Microsoft
and AT&T. Suppose the stock prices are 120 and
30 respectively and the deltas of the portfolio
with respect to the two stock prices are 1,000
and 20,000 respectively
As an approximation
Skewness
(See Figures 18.3, 18.4 , and 18.5)
Quadratic Model
For a portfolio dependent on a single
stock price it is approximately true that
1
2
P S (S )
2
this becomes
1 2
P S x S (x) 2
2
Options, Futures, and Other Derivatives 6th Edition, 18.31
2P
ij
Si S j
Comparison of Approaches
Model
Stress Testing
This
Back-Testing
Tests
2 yr
3 yr
4 yr
5 yr
+10
+4
-8
-7
+2
an approximation
P 0.08 f1 4.40 f 2
The f1
The