Explain why the linear model can provide only approximate estimates of VaR for a portfolio containing...

Explain why the linear model can provide only approximate estimates of VaR for a portfolio
containing options

Solutions

Expert Solution

Answer) The change in the value of option not linearly relates to change in value of underlying variables . Thus when the change in value of underlying variable is normal , the change in value of option is not normal .

But the linear model asumes that it is normal or we can say that the linear model assumes that the change in the value of a portfolio is linearly related to percentage changes in the underlying variables.

It is therefore only an approximation for a portfolio containing options .

jeff jeffy answered 2 years ago

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