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Enron Mail |
Chris,
This is very well written and will serve the reader well. A few comments. 1. When I think about the taxonomy of the VaR models, I typically use the classification based on 3 categories: a. variance/covariance method b. historical simulation c. Monte Carlo simulation. Delta approach is the way of representing a position in a nonlinear instrument. 2. I would define Monte Carlo as an approach based on statistical simulation of behavior of all the market prices/rates, etc., and revaluation of the entire portfolio. The revaluation may be based on an approximation (using Taylor's expansion) that may involve delta, delta/gamma, delta/gamma/omega or may be exact (based on the same model that produces the mark-to-market portfolio valuations). The main benefit of using the MC simulation in the energy markets is the ability to capture the gapping behavior of the energy markets in a straightforward way. I would emphasize that there are attempts to incorporate jumps in the V/C model (I shall send you the references from home). 3. I would mention that historical simulation may break down in the markets that are evolving quickly (new instruments for which we have no comparable prices, behavior of prices may change as markets mature or de-mature). 4. For bigger portfolios, virtually all methods require some level of aggregation into atomic, elemental instruments to reduce the dimensionality of the problem. This process may be a source of a big error. 5. The computational burden of MC can be reduced through clever preprocessing of a portfolio that introduces no error. Many swaps with the same underlying can be aggregated into one positions ( they are portfolios of forwards and they are linear instruments). Please, feel free to use any comment (or none). Vince "Chris Strickland" <chris@lacima.co.uk< on 08/28/2000 02:58:56 PM Please respond to "Chris Strickland" <chris@lacima.co.uk< To: <vince.j.kaminski@enron.com< cc: Subject: EPRM article Dear Vince, ? D you think you might be able to look at this in the next day or so? Robin is after something by the end of this week. ? Best regards. ? Chris. ? - EPRM_01_VaR.doc
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