Jorion, Chapter 7: Portfolio Risk: Analytical Methods

[cfa2015]

Hi David,

How should I interpret the two highlighted amounts $59.55 and $92.55 (Jorion Ch 7 notes, Page 14)?
We are subtracting the Individual VaR of each position from the Diversified Portfolio VaR ($256.9 - $197.38 = $59.55 / 256.9 – 164.49 = $92.45).
Is this Incremental VaR (Marginal VaR * Position)?

Thank you much.

 

[David Harper CFA FRM]

Hi @cfa2015 Yes, that's correct. In this case of only two positions in the portfolio the Incremental VaR of the CAD position is $59.55 because Incremental (CAD) = Portfolio VaR(total portfolio) - Portfolio VaR (total portfolio - CAD position); i.e., Incremental (CAD) is the change in VaR due to the subtraction/addition of the CAD position.

It's sometimes confusing because here with only two positions Portfolio VaR (total portfolio - CAD position) = VaR(EUR position); i.e., if we subtract the CAD position we are left with the EUR position.

So in this special case of only two positions Incremental (CAD) = Portfolio VaR(portfolio) - Portfolio VaR (portfolio - CAD position) = Portfolio VaR(portfolio) - Individual VaR (EUR). I hope that explains!

 

[cfa2015]

Thank you very much for the prompt reply.