re : eprm article 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 " on 08 / 28 / 2000 02 : 58 : 56 pm
please respond to " chris strickland "
to :
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
re : eprm article
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 " on 08 / 28 / 2000 02 : 58 : 56 pm
please respond to " chris strickland "
to :
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