January 21, 2013

Understanding Historic VaR

Pretty much all the CCPs are using Historic VaR for their Rates business, as evident in this chart. At a recent event, I pointed out that VaR and methods related to distributions have become key to the future of protecting us all from the dynamics of the capital markets. At this same event with about 80 people in the room, I asked the question "who here can confidently explain how VaR works?", of which myself and one other put their hands up. So my question to you all is this: If I ran a webinar covering how to step through performing a historic VaR in the manner of a CCP, would you be interested? I think the material would take an hour or two to explain, it's tricky but achievable for most people to see that VaR isn't so difficult. The agenda could include, subject to time and patience, and not necessarily in this exact order:

  • What is a yield curve – how are Rate Swaps priced?
  • What is PV01? What does it mean to move a curve?
  • What is a distribution? What can we learn from them? How can they trick us?
  • Measuring the height of penguins – my favourite
  • What is a Mark-to-Market? So therefore what is Variation Margin?
  • How does PAI work?
  • A real world VaR example using Goldman Sachs annual report
  • The three varieties of VaR: VCV, HS & MC
  • What is a holding period? And no it's not how long you hug your significant other.
  • What does "historic" VaR mean?
  • What does "confidence level" mean?
  • What is volatility? How to apply it to a yield curve.
  • How to filter volatility, using EWMA or GARCH
  • Step by step – calculating VaR on a trade portfolio
  • Building the scenarios
  • Applying scenarios to your trades
  • Assembling the scenario outcomes
  • Picking the IM number using your chosen confidence level
  • Back testing the IM
  • How does IM relate to hedging prior to an auction

I might be a bit ambitious with this, so perhaps I'll break the whole lot down into a couple of sessions. And secondly, if you're interested, what monetary value would you place on know all this? Email me from my contact page if you want to communicate privately, or use the poll below to indicate your level of interest: [polldaddy poll=6845512]    

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