jyothi1965
New Member
David
I wrote directly to Herr Gunter Messiner, on the above issue asking him to clarify his method. Clearly it is an internal method used in Deutshe Bank and I would anyday go with the Jorion method. Also the PRM handboook specifies only the Jorion method. So I guess this is one kink smoothened out
J
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Dear Prof Messiner
I write from the island of Bahrain which is Middle East (Dubai, Saudi Arabia, etc). Bahrain hosts the world's 4th largest offshore banking sector and the region is well developed in terms of banking sector.
First of all many congratulations on your path breaking book - Credit Derivatives - which I have used extensively to pass the PRM exam. I am appearing for the FRM Exam on 17th Nov and I find that our assigned readings (Messier and Jorion) have indicated two different methods of calculating VaR of options.
In your method you recommend that we simply add the Delta and the Gamma (Pages 182-185 of Chapter 6) to calculate the notional amounts of the options and then calculate VaR using the portfolio theory model.
Jorion on the other hand, recommends calculating VAR for the underlying and then using a delta Gamma for taking non linearities into account and hence calculating the VAR
As students we are confused. There does not appear to be a common logical thread between the two.
Since the exam is very nearby, we would be very grateful if you could clarify on how to connect between the two methods.
Many thanks
Best regards
Herr Mesinner reply.................................................................
Mr. Venkatesh,
In your method you recommend that we simply add the Delta and the Gamma (Pages 182-185 of Chapter 6) to calculate the notional amounts of the options and then calculate VaR using the portfolio theory model.
Jorion on the other hand, recommends calculating VAR for the underlying and then using a delta Gamma for taking non linearities into account and hence calculating the VAR
Both methods are applied in practice. We used the one I described at Deutsche Bank.
I looked at Jorion's book "Value at Risk", 2.edition, from 2000. He discusses the Delta-Gamma
approximation on p.212. There is no 'direct link' between the methods. Both are
approximations. It depends on the type of assets in the portfolio, which works better.
Hope this helps,
Best,
Gunter Meissner
Gunter Meissner, PhD
President Derivatives Software (www.dersoft.com)
Associate Professor of Finance (www.hpu.edu)
Email: .(JavaScript must be enabled to view this email address)
Tel: USA 808 524 9311
I wrote directly to Herr Gunter Messiner, on the above issue asking him to clarify his method. Clearly it is an internal method used in Deutshe Bank and I would anyday go with the Jorion method. Also the PRM handboook specifies only the Jorion method. So I guess this is one kink smoothened out
J
--------------------------------------------------------------------------
Dear Prof Messiner
I write from the island of Bahrain which is Middle East (Dubai, Saudi Arabia, etc). Bahrain hosts the world's 4th largest offshore banking sector and the region is well developed in terms of banking sector.
First of all many congratulations on your path breaking book - Credit Derivatives - which I have used extensively to pass the PRM exam. I am appearing for the FRM Exam on 17th Nov and I find that our assigned readings (Messier and Jorion) have indicated two different methods of calculating VaR of options.
In your method you recommend that we simply add the Delta and the Gamma (Pages 182-185 of Chapter 6) to calculate the notional amounts of the options and then calculate VaR using the portfolio theory model.
Jorion on the other hand, recommends calculating VAR for the underlying and then using a delta Gamma for taking non linearities into account and hence calculating the VAR
As students we are confused. There does not appear to be a common logical thread between the two.
Since the exam is very nearby, we would be very grateful if you could clarify on how to connect between the two methods.
Many thanks
Best regards
Herr Mesinner reply.................................................................
Mr. Venkatesh,
In your method you recommend that we simply add the Delta and the Gamma (Pages 182-185 of Chapter 6) to calculate the notional amounts of the options and then calculate VaR using the portfolio theory model.
Jorion on the other hand, recommends calculating VAR for the underlying and then using a delta Gamma for taking non linearities into account and hence calculating the VAR
Both methods are applied in practice. We used the one I described at Deutsche Bank.
I looked at Jorion's book "Value at Risk", 2.edition, from 2000. He discusses the Delta-Gamma
approximation on p.212. There is no 'direct link' between the methods. Both are
approximations. It depends on the type of assets in the portfolio, which works better.
Hope this helps,
Best,
Gunter Meissner
Gunter Meissner, PhD
President Derivatives Software (www.dersoft.com)
Associate Professor of Finance (www.hpu.edu)
Email: .(JavaScript must be enabled to view this email address)
Tel: USA 808 524 9311
