Marginal/Conditiona VARS
- Thread starter rickm123
- Start date
Hi Rick,
Realistically, no, it is not necessary. For exam, I'd think you only want:
Thanks,
Realistically, no, it is not necessary. For exam, I'd think you only want:
- Jorion 7.20: Marginal VaR = Portfolio VaR / W * beta(i,P) ... b/c beta is more likely/natural than dollar covariance, and
- Jorion 7.27: Component VaR = marginal VaR * Position ... b/c it uses marginal VaR
Thanks,
Hi David,
I am little confused with Marginal, Incremental and other var concepts after reading Jorion. In Jorion, marginal is defined as the var change due to an additional $1 of exposure in a certain position and then Incremental is change in var due to new position in a portfolio.
The way i understand diff VARs from my current work exp is -
lets say i have a position in Gold of about 100 lots in a portfolio (hereafter PF) and its giving me a position var of $X, Marginal VAR of $Y(- or + indicating whether 100 lots acting as risk additive or diversifier to PF), Incremental VAR (if existing position is increased by 10%) of about $Z (in excess of current var being used).
the way we calc marginal var is = PF VAR without Gold positions - PF VAR with Gold Position. If its -ve then position is risk additive otherwise diversifier.
So in my view incremental tell me the incremental var change due to additional exposure and marginal tell me if the position is acting as a hedge to PF or adding risk or when i look at all position marginals - "where are my biggest risk to overall PF". Component is another way of looking at the same thing as to "where are my biggest risk to overall PF".
Further i understand
Incremental var concept is applied generally if you are adding or reducing positions w.r.t an existing position in a PF, to indicate how much var will be used in case trader decides to do the trade. In case of a done trade or entirely new position being introduced to PF, marginal would be a better gauge of daily risk to PF, as to how much marginal var this new position is contributing to the PF and whether it acts as a additive or diversifier to PF (Jorion indicated Incremental to do this job where he talks about before and after var with full reval, I am not sure about this). Marginal would help to decide in reducing or adding risk decisions as it captures the PF risk effects.
Could you pls help me to understand what Jorion is trying to explain with these - marginal, incremental and component? Is my understanding not in line with Jorion or it may be the case that my firm does it that way?
Sorry about the long note above, feels i am muddled in my own thots and creating more confusion. I am also trying to get my understanding clear to be in line with what FRM exam expects.
Pls advise.
Thanks!
Ankur
I am little confused with Marginal, Incremental and other var concepts after reading Jorion. In Jorion, marginal is defined as the var change due to an additional $1 of exposure in a certain position and then Incremental is change in var due to new position in a portfolio.
The way i understand diff VARs from my current work exp is -
lets say i have a position in Gold of about 100 lots in a portfolio (hereafter PF) and its giving me a position var of $X, Marginal VAR of $Y(- or + indicating whether 100 lots acting as risk additive or diversifier to PF), Incremental VAR (if existing position is increased by 10%) of about $Z (in excess of current var being used).
the way we calc marginal var is = PF VAR without Gold positions - PF VAR with Gold Position. If its -ve then position is risk additive otherwise diversifier.
So in my view incremental tell me the incremental var change due to additional exposure and marginal tell me if the position is acting as a hedge to PF or adding risk or when i look at all position marginals - "where are my biggest risk to overall PF". Component is another way of looking at the same thing as to "where are my biggest risk to overall PF".
Further i understand
Incremental var concept is applied generally if you are adding or reducing positions w.r.t an existing position in a PF, to indicate how much var will be used in case trader decides to do the trade. In case of a done trade or entirely new position being introduced to PF, marginal would be a better gauge of daily risk to PF, as to how much marginal var this new position is contributing to the PF and whether it acts as a additive or diversifier to PF (Jorion indicated Incremental to do this job where he talks about before and after var with full reval, I am not sure about this). Marginal would help to decide in reducing or adding risk decisions as it captures the PF risk effects.
Could you pls help me to understand what Jorion is trying to explain with these - marginal, incremental and component? Is my understanding not in line with Jorion or it may be the case that my firm does it that way?
Sorry about the long note above, feels i am muddled in my own thots and creating more confusion. I am also trying to get my understanding clear to be in line with what FRM exam expects.
Pls advise.
Thanks!
Ankur
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