Value At Risk (VaR)

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Value At Risk (VaR)

Postby swarnendupathak » Wed Sep 26, 2012 2:21 pm

Just refering to Value at Risk chapter of Options Futures & Other Derivatives of John C Hul. While calculating the portfolio (two asset case) VaR, Sd of portfolio has been calculated without considering weights of the assets. (refering the example of Microsoft & AT&T), this confuses me.
Please clarify.

Swarnendu Pathak


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Posts: 356
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Re: Value At Risk (VaR)

Postby content.pristine » Wed Sep 26, 2012 8:00 pm

Hi Swarnendu,

In HULL, they directly took σx as the change in value of the entire Microsoft position. This is in dollars. They have already the actual holding size of $10 Million in Microsoft. 8-) Using the formula, they have the standard deviation of $10M in Microsoft and $5M in AT&T. In that case, if we use weights, that would be double counting the weights ;)

We use the weights in the formula when σ is given in %. Then we get the VaR in %. :)

Hope this helps..

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