YouTube T5-05: Value (VaR) Mapping a fixed-income portfolio

[Nicole Seaman]

In this video, we walk through an actual case study of Value at Risk (VaR) mapping, specifically as it is illustrated by Phillip Jorion in Chapter 11 of his book, Value at Risk. We will take a two-bond fixed income portfolio. It's going to have a value of 200 million, and we're going to look at VaR mapping under three different approaches. That mapping means that we'll take the value of the portfolio and we'll map it to one primitive risk factor or, in the more sophisticated case, five primitive risk factors. This will be a simplification exercise so that we can take in theory what is a complex portfolio and replace it, or map it to, a limited set of simple risk factors. Then we can shock or stress the risk factors as a means of estimating the risk of the portfolio.

 

[BDonn]

Hi David,

Is it possible to post the excel file from the video? I'd like to explore this further and I've ordered the book mentioned in the description, but while waiting for it to arrive, I would love the chance to play with the excel file if possible.

Thank you so much!
Brian

 

[BDonn]

Good morning, just checking in, is it possible to post the excel for this one? Still curious about it, thank you!

 

[David Harper CFA FRM]

Hi @BDonn Sure thing (sorry i missed your earlier request), thank you for liking the video. Here is the XLS I created/used for it:

101619-var-map-fixed-income.xlsx

Shared with Dropbox

www.dropbox.com

 

[BDonn]

Thank you! : )

 

[jan molina]

Is this an historical simulation aproach ?

 

[David Harper CFA FRM]

Hi @jan molina No, this is VaR mapping; aka, risk factor VaR mapping. It is compatible with any of the three major VaR approaches (analytical/parametric, historical simulation, or Monte Carlo simulation).

 

[jan molina]

thanks, can you make a historical var for fixed income portfolio?

 

[mt1327]

Hi @David Harper CFA FRM,

Perhaps it's a bit beyond the scope of the FRM exam itself, but I am trying to understand Jorion example 11-5 a little better. I couldn't find the walked-through steps in any of the spreadsheets, so I've recreated the table on my side. To start with, it looks like the index and 5 sample portfolios are already given to us after discounting. Hence, we should be able to use the un-diversified cash flow mapping approach to calculate the aVaR. However, for the index portfolio, I get 1.69 instead of 1.99 given in the table (using a simple sum product of the risk and discounted cash flow at each vertex. Wouldn't we expect 1.69 to be an upper bound on the VaR since any diversification would reduce the aVaR further? For that reason, I am not sure where the 1.99 is coming from. Portfolio 1 and Portfolio 5 under the un-diversified VaR approach actually matches what is in the table, but I am not able to match any of the other portfolios. Perhaps I am over-analyzing and the idea is that the aVaR for this example is an output of some VaR model. Things would probably be easier if I also had access to Jorion book itself, but unfortunately I am waiting for my FRM Part 1 result to come out first before GARP gives me access to the books.

Any help is much appreciated!

Thanks,

Marc

 

[kc]

Hi @Nicole Seaman, can you please help restore the excel file? Thanks!

 

[Nicole Seaman]

Hi @Nicole Seaman, can you please help restore the excel file? Thanks!

@kc The Dropbox link has been fixed above. Thanks for pointing this out.