FX Options VaR Simulation using Historical implied vols

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sga4199
Posts: 2
Joined: Mon Sep 15, 2014 1:10 pm

FX Options VaR Simulation using Historical implied vols

Postby sga4199 » Wed May 20, 2015 2:02 pm

Hi. if anyone has thoughts on the following it would be appreciated. We currently model Historical FX option Var using constant volatility - i.e todays cap/floor vol based on the maturity of the option. Instead i wish to model FX options VaR using a time series of Implied Vol at fixed deltas (a Delta ladder) so as to include the vol of the implied vol over time. If the Delta ladder of implied vols are the risk factors what i am unsure about is how to associate the appropriate implied vol-delta risk factor to the option trade. Is it correct to calcuate the current delta of the option using MTM, forward looking cap/floor vols, etc (via BS) and use this delta to assign the correct the risk factor ? IF not, what is the general market practice for modelling FX Options with implied volatility history ?
Thanks
Alan

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