Following our previous post on handling outlier data, our 5-part series on the benefits of Run Smart™ CRTM managed services from Value Creed concludes with a discussion of analyzing and managing Value at Risk.
Value at risk (VaR) is one of the most useful risk calculations, as it allows for a consistent analysis of positions and price movements for a given portfolio across time. By knowing with 95 percent confidence, for instance, that a position or portfolio’s predicted daily outcome will not exceed an established VaR limit, risk managers can make more informed decisions about whether to recommend that traders maintain, liquidate, or increase their holdings in a certain commodity, location, and time period.
Whether basing VaR calculations on historical price data, the covariance/variance method, or a Monte Carlo simulation, VaR enables commodities traders to visualize how observable market inputs such as current and forward prices, implied and historical volatility, interest rates, exchange rates, etc. affect their risk position.