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Monte Carlo VaR modeling on options portfolio

CLIENT

A European Investment Bank.

OPPORTUNITY

The client wanted to develop a Value at Risk (VaR) model for their large options book. The option book contained financial instruments with path dependent payment structures.

SOLUTION

SG Analytics deployed a team of offshore quant analysts to support the client’s onshore team in conducting daily VaR calculations based on a Monte Carlo approach.
  1. The team assessed the client’s option portfolio and broke down its components by underlying asset classes, e.g. stocks, futures, commodities, currency, and indices to build a replicating portfolio.
  2. Under consideration of the client’s models for possible movements of the underlying asset prices, the team simulated a large number of scenarios consisting of potential price paths.
  3. Using the scenarios, the team calculated the portfolio’s overall VaR as a percentile of the option book’s Monte Carlo risk distribution.
SG Analytics would monitor the model and report real-time, end of day VaR on 95% and 99% fallouts to the client’s risk managers.

VALUE DELIVERED

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1
The client's management could gather a complete risk profile of their options book spread across currencies and index options.
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2
SG Analytics model also allowed real-time insights into the VaR, Gamma, Theta, and Vega of the option book and hence control the risk exposures.
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3
The reports became one of the most insightful tools for the client's risk management to control their option book.
 

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