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Lending - An Introduction
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Understanding Private Wealth Management Business
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VAR - Variance-Covariance Approach
This course examines the first of the three approaches to calculating VAR - the variance-covariance or parametric approach. Starting off with a simple, single-asset portfolio, the course progresses to include more advanced VAR calculations for portfolios containing derivatives, incorporating concepts such as incremental VAR and interest rate dependent mapping.
On completion of this course, you will be able to:
• Use the variance-covariance approach to calculate VAR for both single-asset and multi-asset portfolios
• Use incremental VAR (IVAR) to identify the different contributions individual assets make to the overall VAR of a portfolio
• Use mapping to calculate the VAR of portfolios that contain instruments with multiple cashflows
• Calculate VAR for portfolios containing derivatives
Topic 1: Calculating VAR Using the Variance-Covariance Approach
• What is the Variance-Covariance Approach?
• The Assumptions Underpinning the Variance-Covariance Approach
• Calculation of VAR for a Single-Asset Portfolio
• Calculation of VAR for a Two-Asset Portfolio
• General Formula for Portfolio Variance
• Calculation of VAR for a Multi-Asset Portfolio
Topic 2: Incremental VAR
• What is Incremental VAR?
• Calculating IVAR
Topic 3: Mapping Positions
• What is Mapping?
• The Mapping Procedure
o Determine the Cashflows Involved
o Calculate the NPV of the Cashflows
o Calculate the Proportion of the Cashflow Allocations
o Map the Cashflows
o Calculate the VAR
Topic 4: Calculating VAR for Portfolios Containing Derivatives
• VAR and Derivatives
o FX Forwards
o Forward Rate Agreements
o Interest Rate Swaps
• Options – Comparison of Delta & Delta-Gamma Approximations
VAR - An Introduction - View Now
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VAR - Monte Carlo Simulation
This course looks at how Monte Carlo simulations are applied to VAR calculations. Monte Carlo VAR is an important approach because it can be used for more difficult positions, such as those involving optionality, when other approaches such as variance-covariance are inappropriate.
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