Calculating VaR - For a single security using VCV & Historical Simulation approaches

In part 1c, we walk through the process of calculating VAR for currencies. We start with a simple data sheet and construct an excel sheet that handles the calculation of VaR for each currency under the variance covariance (VCV) & historical simulation approaches. We see how daily, annualized, holding period and 10-day Trailing volatility are calculated. We present a crude approximation of worst case loss using the maximum trailing volatility figure and use it to present the disconnect between actual loss and that given by the VCV VaR measure. We review the installation of the Data Analysis function in Excel and use the in-built Histogram function to determine the worst case loss for the historical simulation approach. Finally we compare VAR results under both approaches.
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Category:

Education

Tags:

• Volatility
• vol
• standard deviation
• Value at Risk
• VaR
• variance covariance
• historical simulation
• annualized volatility
• EXCEL
• trailing volatility
• holding period
• data analysis
• histogram
• worst case loss
• normal distribution
• confidence interval
• tolerance level