Exam3:VAR for portfolio of options.

[Anonymous]

Hi,

Can someone throw light on how to calculate VAR for portfolio containing 2 options taking into consideration both delta and Gamma.

Thanks,
Arun

[Arun]

Exam3:VAR for portfolio of options.

[Anonymous]

VaR calculation for options portfolio can be done using delta-gamma-theta approximation so as to estimate the variance of the portfolio. Using this method, the delta of an option is calculated as:

delta(option) = delta.(dS)+ (1/2)gamma(dS)²+theta.dt

Assuming dt is small, the last part of this equation can be ignored and the variance of the option is expressed as:

sigma²(option) = (delta.S.sigma)² + (1/2).(gamma.S².sigma²)²

The VaR calculated using this approach only provides an approximation of the true VaR of an options portfolio.

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