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Why does stress testing not replace VaR for an option-heavy portfolio?
Because the two tools answer different governance questions. Stress testing tells you what happens under selected severe scenarios. That is excellent for exposing vulnerability to curve shocks, volatility jumps, or liquidity breaks. But it does not t
How do I fix a Monte Carlo VaR workflow that mixes log returns and simple returns?
The fix is to be consistent about what object you are aggregating. For multi-asset portfolios, the weighted sum relationship applies cleanly to simple returns, not to log returns. A safer workflow is: 1. Simulate correlated log returns for each asset
Why can expected shortfall move a lot even when VaR barely changes?
VaR and expected shortfall look at different parts of the loss distribution. - VaR asks for the cutoff. - Expected shortfall asks for the average loss after the cutoff has already been breached. So two portfolios can share the same `99%` VaR and stil
When should I prefer historical simulation VaR over delta-normal VaR?
Historical simulation becomes more attractive when the portfolio cannot be summarized reliably with a small-move linear approximation. That usually happens when: - options or callable instruments make payoffs curved rather than linear - current holdi
Why do hedge calculations often use dollar duration or DV01 instead of just modified duration?
Modified duration gives relative sensitivity. Hedging needs absolute exposure. Suppose one position is `3,000,000` par and another is `12,000,000` par. Even if the first bond has slightly higher modified duration, the second position may create more
How should I think about the relationship between Macaulay duration and modified duration instead of memorizing two separate definitions?
Start with Macaulay duration as the time structure of the bond, then view modified duration as that timing structure translated into local price sensitivity. Macaulay duration answers: "On a present-value-weighted basis, how far away are the cash flo
When should I stop using modified duration and switch to effective duration?
Switch to effective duration when a rate move can change expected cash flows, not just discount rates. Modified duration works best when promised cash flows stay fixed. That is usually fine for a plain corporate bond. It becomes unreliable for callab
Why is DV01 so much smaller than dollar duration if both are supposed to measure rate risk?
DV01 is not a different risk from dollar duration. It is the same first-order rate exposure shown on a practical basis-point scale. Suppose **Lakeshore Transit Finance 2032** has: - full price `98.50` - modified duration `4.4` Dollar duration per `10
How do I compute VaR for an FX position when my account base currency is different?
FX VaR should be computed from P/L translated into the account base currency, not just from the quoted pair return...
How does an Expected Shortfall constraint work in portfolio optimization?
An Expected Shortfall constraint limits the average loss in the selected tail of the scenario loss distribution...
Are there standard horizons, percentiles, and lookback windows for VaR reports?
VaR horizons, confidence levels, and lookback windows are conventions tied to purpose rather than universal constants...
What is the intuition behind expectiles as a risk measure?
Expectiles act like asymmetric means, using heavier penalties on one side of the distribution to capture tail severity...
What does it mean when people say VaR is not subadditive?
VaR is not always subadditive, which means it can fail to reward diversification for certain lumpy loss distributions...
How do I choose the right time series for VaR on futures contracts?
Futures VaR depends on choosing a risk series that reflects roll behavior, liquidity, maturity, and seasonality...
How do volatility models fit into distribution-based VaR estimation?
Volatility models forecast conditional scale, while the return distribution controls the standardized shock and tail shape...
Is overlapping data a problem in VaR backtesting?
Overlapping calibration windows are normal, but overlapping realized loss horizons can distort VaR backtest inference...
How does VaR mapping work for an FX forward?
FX forward VaR mapping decomposes the trade into spot FX and domestic and foreign rate risk factors...
How does a copula help calculate portfolio VaR?
A copula models dependence between risk drivers, then portfolio VaR is read from the aggregated loss distribution...
Why can parametric VaR and Monte Carlo VaR disagree under a lognormal assumption?
Parametric and Monte Carlo VaR can differ when loss definitions, compounding, drift, or finite simulation error do not match...
What should a VaR framework actually do if a pricing library already exists?
A pricing library values instruments, while a VaR framework manages scenarios, mapping, aggregation, reporting, and controls...
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