Value at Risk Analysis

Stay within set risk tolerance limits. Quantify the market risk level for portfolio and asset classes with diversification effect. Hedging recommendations for entry and exit from hedges.

Centroid Risk - Value at Risk Analysis

Why is Value at Risk Analysis important for brokers?

In addition to monitoring the risk exposures and the P&L, brokers also need to measure and quantify the level of the market risk on their portfolio net exposure. This helps brokers to understand what could be the worst loss case-scenario value on the current portfolio net exposure tomorrow, under normal market conditions. This value is also used as a basis for estimating sufficient amount of operating capital that is needed, in order to sustain that worst-case loss scenario, if it happens. In addition, it helps to define clear market risk limits on the portfolio net exposure, within which the broker wants to operate, for example, in relation to the size of its balance sheet.

Centroid Risk software includes an advanced Value at Risk (VaR) analysis system. This is a fully automated, real-time system, that works based on historical simulation method. VaR is a measure of the worst expected loss that a broker may suffer on a portfolio net exposure over a period of time under normal market conditions and a specified confidence level (certain level of probability).

How does VaR Analysis works?

Centroid VaR analysis system continuously monitors the current net exposure dynamics across all the instruments in the portfolio of the broker, and simulates that exposure over 10+ years of historical daily market tick prices. When calculating the VaR over the historical period, the system takes into account the volatility of the instruments and other relevant statistical measures. In the output the system estimates with 95% and 99% confidence levels, the worst expected loss case-scenario (an indicative P/L value in US dollars) that can happen tomorrow on the current portfolio net exposure, under normal market conditions.

For example, if daily VaR Low is calculated to be $108,419 for a 95% confidence level, this means that during the day there is 95% chance (based on 10+ years of historical data) that the maximum loss that can happen tomorrow on the current portfolio net exposure will not exceed $108,419. Another way to interpret the same information, is that during the day there is only 5% chance that the maximum loss that can happen tomorrow on the current portfolio net exposure will be greater than $108,419.

It is also possible to set the market risk limits on a portfolio VaR for 95% or 99% confidence level. The system will monitor everything automatically in real-time, and in case portfolio VaR limits are breached, the system immediately produces efficient hedging suggestions for C-Book (for both: entry and exit from hedges). Following the portfolio hedging suggestions will help broker to stay within the desired market risk appetite.

  • Real-time Value at Risk (with 95% & 99% confidence intervals) is calculated at a portfolio and asset class levels with portfolio diversification effect, based on
  • 10+ years historical simulation method;
  • Daily, weekly, monthly VaR;
  • Highest, Lowest and Average VaR for 5 and 22 trailing days.
Centroid Risk - VaR Analysis - Management Chart

Who will benefit from this feature?

CEO, COO, CRO, Risk Managers, Dealing desk, Operations Managers

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