VaR with Futures

[Binglebongle]

Am fairly new to VaR, but I do understand how it is supposed to work for say basic stock prices historically. However how is VaR calculated when there is a forward curve of prices, as for example with Futures? The only method I can think of is taking every price for a delivery/expiry date for an underlier and converting them to time to expiry and then seeing the % change to the next day. For example a 3 month contract on the 1st of Feb and comparing it with a 3 month contract on the 2nd Feb. Then also doing this for a 1 month contract and in fact all forward contracts. Is this right?

 

[ShaktiRathore]

Hi
Forwards/futures are linear functions of stock price i mean F=SP*exp(rT) where r and T are constants. Therefore Var of Forward/Future=delta*Var of stock(SP) where delta for future is exp(rT), and for forward is 1. So you just multiply delta of futures position with SP to get the futures Var. Your method i think takes into account historical volatility that is projecting past futured price change into the future.
Thanks

 

[Binglebongle]

Hi - thanks for the response! Your equation is for basic futures and I think what you are saying is whatever the spot price changed by as a % from one day to the next, change the corresponding futures price (using your equation) by the same %. Is that right?

 

[ShaktiRathore]

Change corresponding futures price by delta times a%. Thanks

 

[Binglebongle]

Doesn't this assume a parallel shift of the whole curve? What about for example a shift from contango to backwardation?

 

[ShaktiRathore]

Yes it assumes a parallel shift of spot price curve to form futures price curve and get Var of futures in similar way as we get Var os SP. In the end Var of SP gets multiplied by delta to get Var of futures. Contango and backwardation interchange is possible.
Thanks