While working with Value at Risk, we are often looking at calculating the P/L of individual positions, and then calculating the portfolio P/L based on the individual positions. However, there are a few problems in doing so. First, it is not possible to model each and every position in the portfolio, as there could be […]
Mapping Positions to Risk Factors
Mapping Spot FX Positions
In the previous article, we learned the need for VaR Mapping, and how financial instruments can be broken down into simpler building blocks/primitive instruments, which are mapped to a small set of risk factors. One such building block instrument is spot FX positions, where you hold a foreign currency instrument whose value is fixed in […]
Mapping Equity Positions
Equity positions are a bit more tricky compared to the FX positions. The main problem arises while dealing with the correlations between the different equity positions. As the number of positions in the equity portfolio increases, the correlation matrix can become substantially large and almost impossible to handle. In case of equity positions, the number […]
Mapping Zero-coupon Bonds to Risk Factors
We earlier learned that VaR calculation of a complex portfolio can be simplified by decomposing the instruments into building blocks, or primitive instruments, which are further mapped to a small set of risk factors. Zero-coupon bonds are one such primitive instrument apart from spot FX positions, equity positions, and futures/forwards. In this article we will […]
Mapping Futures/Forward Positions to Risk Factors
We have learned about how various complex positions can be broken down into elementary blocks which can be further mapped to risk factors. The four such elementary blocks/instruments are Spot FX positions, Equity Positions, Zero-coupon bonds, and Future/Forward positions. In this article we will look at mapping futures/forward positions. A forward contract is an agreement […]
Mapping Complex Financial Positions
We have now learned about how VaR can be calculated for primitive positions including spot FX positions, equity positions, zero-coupon bonds, and futures/forward positions. We will now look at how complex positions can be decomposed into these primitive instruments which are mapped to risk factors. In this article we will take a look at some […]
VaR Mapping for Options Positions
In the previous article we learned about how to map various complex positions such as coupon paying bonds, FRAs, and swaps. All these complex positions had linear payoffs and were fairly straightforward to map. However, there are other positions such as options where the payoff is non-linear. In such a case the mapping process becomes […]