Value at Risk using the Monte Carlo simulation with Historical Returns approach

About the Course

The course consists of an EXCEL file that calculates the Value at Risk metric using a variation to the original Monte Carlo simulation model for simulating a path of prices. In the original model the prices are simulated based on the assumption that the returns follow a normal distribution. In the variation the prices are generated assuming that returns are randomly selected from the actual historical return distribution of the commodity/ instrument. A hybrid between the static Historical Simulation VaR approach and the Monte Carlo simulation VaR approach, it aims to produce results that are closer to the true distribution of price returns. The worksheet contains:

• Derived returns series for 2004-2012 price/ rate data for Crude Oil, Gold, Silver and EUR-USD FX exchange rate
• Derived adjusted zt series based on the actual historical return series
• 365 - day price path generated using the original normally distributed return Monte Carlo simulator (MC -Normal approach)
• 365- day price path generated using the hybrid actual historical distribution of returns Monte Carlo simulator (MC- Historical approach)
• Simulated price return series for the MC- Normal, MC -Historical approaches
• Price return series for the Historical Simulation approaches using a 365-day window of the most recent prices in the dataset
• Chart and graphical output for histograms of the return distributions from all three approaches
• Calculated Daily VaR at the 99% confidence level for each of the three approaches using the histogram output
• Data table of 25 simulated runs for each approach and average daily VaR across all scenarios
• A summary tab showing the graphical output for each commodity and method

Learning Objectives

After taking this course you will be able to:

• Calculate VaR using the original Monte Carlo Simulation approach
• Calculate VaR using the Historical simulation approach
• Calculate VaR using the hybrid approach
• Graph results of all three approaches
• Compare results of all three approaches

Prerequisites

Familiarity with the various Value at Risk calculation approaches, Monte Carlo simulation and EXCEL

Target Audience

The course is targeted towards intermediate and advanced users and is aimed primarily at individuals responsible for capital allocation, limit setting and risk management within banks, insurance companies, mutual funds, as well as finance departments of non-financial organizations who need to quickly review or refresh their understanding of VaR methodologies for work or professional development.