Riskmetrics

Discussion on Value-at-Risk Models
Forum rules
DISCLAIMER: We do not warrant or represent that this forum or its content is free of viruses, worms or other code that might be contaminating or destructive. We cannot guarantee that documents or files downloaded from the Site will be free from viruses and we do not accept any responsibility for any damage or loss caused by any virus. Accordingly, for your own protection, you must use virus-checking software when using the forum. You must not post or provide to us via the forum, any document or file which you believe may contain a virus. You must virus check any document or file which you intend to post or provide to us via the forum. You must ensure that any document or file you intend to post to the forum does not contravene any applicable laws or contravene any person's legal rights. We do not accept any responsibility for any damage or loss you may suffer.
Federico
Posts: 2
Joined: Mon Oct 22, 2012 11:55 am

Riskmetrics

Postby Federico » Mon Oct 22, 2012 1:43 pm

Good morning Carol,
I've a question about the JP Morgan Riskmetrics document.
I've attached the derivation of the formula relating the absolute change in the value of a forex option to a relative change in the foreign exchange rate. The point is equation [5] in the second page since the relative return on the option is obtained by dividing the absolute change by the exchange rate at the initial time t. Could you clarify this point?
Many thanks in advance

Fede
Attachments
Formula.pdf
(72.48 KiB) Downloaded 516 times

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: Riskmetrics

Postby coalexander » Sat Nov 03, 2012 4:39 pm

Apologies for the late reply - now that I am rather busy at Sussex I'll usually be answering forum questions at the weekend.

I don't see anything wrong with the formula, they look at the absolute change in the option value, as a proportion of the underlying price...but anyway I suggest you ask RiskMetrics themselves regarding questions relating to their documentation.

Cheers, Carol

Federico
Posts: 2
Joined: Mon Oct 22, 2012 11:55 am

Re: Riskmetrics

Postby Federico » Sat Nov 03, 2012 6:32 pm

Dear Carol,
first of all thank you so much for your reply.
Just one note: my question is not about the absolute change in the value of the option that is absolutely correct. The point is the relative return on the option (equation [5]) since to get it both sides of equation [4] are divided by P_x while I'd expect them to be divided by V_0.
P.s.: Before sending my previuos post I submitted the same question to Riskmetrics group but they give explanations just to their clients.
Best regards
Federico

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: Riskmetrics

Postby coalexander » Sat Nov 03, 2012 10:11 pm

Hi Frederico

I guess when they say 'relative' price, it can be relative to anything. Very often, it is the option price relative to the underlying price that we mean when we talk about relative prices (eg as in "relative prices should be unchanged when a numeraire changes", or when there is a change of scale - that is definition of scale-invariant model)

I can't answer for riskmetrics, but I hope this comment is at least of some help, Carol


Return to “Volume IV”

Who is online

Users browsing this forum: No registered users and 1 guest