#5: Keeping Value At Risk (VaR) Reports On Track
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.
Consequences of Weak VaR Reporting and Analysis
Position analysis too often depends solely on end-of-day reports that may or may not reflect intraday volatility and trading patterns. The data loses much of its power as the new trading day evolves. It may be virtually worthless in the realm of automated and algorithmic trading executed by Ai capable of making decisions based on dozens of extrapolated distribution curves generated every second. Accurate VaR reports and intraday transparency empowers more sophisticated trading plans that reduce risk and enable greater profitability.
Without a unified, holistic view of the risks inherent in their positions and portfolio, risk managers cannot precisely evaluate their processes, workflows, trader activities, and external events to determine appropriate guidelines.
Commodity traders who rely on less-than-robust CTRM systems put themselves at a disadvantage. Legacy systems and those that depend on manual inputs and Excel spreadsheets are prone to human errors, inconsistent formatting, and difficulty integrating with scheduled processes and reporting tools.
The Run Smart™ Integrated Solution for Reliable Intraday VaR Reporting
Value Creed’s integrated CRTM managed service platform, Run Smart™, is easily customizable to any business model. The platform streamlines user-configurable trade rules and risk-management policies for enterprises at any link in the commodities value chain. Run Smart™ interfaces with downstream reporting software and upstream transaction-reporting and data sources. Its reporting capabilities capture, collect, and present real-time market updates, physical stores and portfolio positions. Users can isolate VaR (as well as P&L, credit, and other metrics) by asset, commodity, region, trader, and other inputs.
Every night, Run Smart™ evaluates the calculated VaR for the portfolio or selected segment with the confidence interval, loss limit, and timeframe established by the user. Breaches are highlighted, so risk managers can reevaluate their position and make adjustments to contain risk.
The platform maintains a record of daily price and VaR fluctuations throughout the timeframe and confidence level the user desires. As asset values change, VaR changes. Risk managers can compare all variables from day to day, plot moving averages, and use statistical methods to spot profitable trends.
Understanding and limiting Value at Risk is a key ingredient in profitable commodities management. Contact Value Creed for a demonstration of how Run Smart™ technology can help your organization make better, data-driven decisions.
This post wraps up Value Creed’s series on the importance of professional managed services for CTRM/ETRM platforms. Read the other four installments to get the full picture: