Delta Normal VaR

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Delta Normal VaR

Postby swarnendupathak » Thu Nov 01, 2012 2:40 pm

The delta-Normal method of VaR of an Option position tells us that as an option moves into the money, then
(a) The VaR of a call falls & VaR of a Put rises.
(b) The VaR of a call rises & VaR of a Put falls.
(c) VaR of a both Call & Put option falls
(d) VaR of a both Call & Put option rises.

Please help me to clear the concept behind the correct answer.

Swarnendu

Tags:

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Delta Normal VaR

Postby swarnendupathak » Fri Nov 02, 2012 9:28 am

Please reply... thanks in advance..

Swarnnedu

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Delta Normal VaR

Postby swarnendupathak » Fri Nov 02, 2012 3:29 pm

PLease reply

Swarnendu

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Delta Normal VaR

Postby content.pristine » Fri Nov 02, 2012 5:07 pm

When an option is out of the money, its has a specific delta and VaR. Lets call them delta1 (lies between 0 and 0.5) and VaR1.
When the underlying moves in such a way that the option is moving in the money. The delta increases from delta1 to 0.5. Now, the risk of the position declines as we get a payoff from the option. Hence VaR decreases.
This is same for both call and put positions.
Hence, C is the answer.
8-)
What is the source of this question?

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Delta Normal VaR

Postby swarnendupathak » Fri Nov 02, 2012 11:54 pm

Thanks very lucid explanation

Swarnendu

AMITAG1990
Finance Junkie
Posts: 89
Joined: Sat Sep 22, 2012 12:35 pm

Re: Delta Normal VaR

Postby AMITAG1990 » Sat Nov 03, 2012 7:32 pm

Sorry Sir but i have doubt, theoritically i agree as option move in the money Var should decrease but in my opinion as the option will move in the money delta of the option increases from 0.5 to 1 and statastically
Var(option)=Delta* var(underlying) and as per this Var should increase. So plz make it little more clear for me.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Delta Normal VaR

Postby content.pristine » Tue Nov 06, 2012 1:47 pm

Hi Amit,

Lets just keep this simple. Lets say I hold a call option, are my losses higher when the call is OTM or ITM? Clearly, OTM is more risky as I lose my premium. For ITM options, the risk is much less as I get a positive payoff that offsets the option cost. When risk is less, VaR is less..

As for your formula, I have never seen it before. Can you give me its source?
8-)


Return to “FRM Part I”



Disclaimer

Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to abuse@edupristine.com and we will rectify it.