Thread by @SAH16928046

I am doing my master's thesis on alternative option pricing models with applications to risk management (e.g. #VaR measures, hedging).
I have a good background in finance and econometrics.
What kind of new and valuable insight could I bring to this topic?
@GARP_Risk @PRMIA

VaR - Value at Risk is not an Option Pricing model!
BSOP Greeks enable the Options trader to understand and hedge against Market Risk in various forms.

You cannot really use VaR to price options on its own.
A RAROC / RARORAC / RORAC/ ROVAR Type Model might do the trick, but that is beyond the scope of your question and this discussion,

Simply put =>
#VaR is a risk measurement derived from a computation technique, used by Enterprise (Financial) Risk Managers, to forecast financial losses.

VaR is a probabilistic, and forward-looking measure of “potential” loss, reported either on an individual asset wise and/or across a portfolio-wide basis!

Market, Credit and Operational VaR Models can further be referred to as the Maximum Loss Measure derived under the given Normal Market or

Operational Statistical Process Control Assumptions.
Operational VaR models, which might use a PMF - Probability Mass Function, are slightly different from their Credit and Market VaR Model counterparts.
They are different VaR Computational Methods / Models.

They are different #VaR Computational Methods / Models.
I won't get into that!

DIFFERENT TYPES OF POTENTIAL LOSSES AS PREDICTED BY THE VaR - VALUE AT RISK MODEL =>
1.A financial (marked to market) loss or an accounting is driven revaluation loss(usually in the trading book).
For, E.g. due to #IFRS9.

2.Capital Impairment Risk driven Loss Event/s, as reported in the context of Private Equity Investments and/or #REITs / Property Market Investments.

3.A Credit Rating Downgrade led Credit Loss Given Event (usually in the banking book or within the fixed income assets portfolio) which is used to predict the maximum credit event-driven loss/es of a Corporate Loan Portfolio (as reported by the JP Morgan styled

aka Credit metrics VaR Model) or a Pooled Default Event(having Homogeneous Characteristics) as witnessed in terms of both the expected

and unexpected loss severity of a Retail Loan Portfolio (as reported by the Credit Risk Plus Model which is a Reduced Form Model, which uses a Poisson Distribution for modelling default incidents).

4.or purely due to an Operational Risk led Loss Given Event. This can be used across different industries, and not just FIs - Financial Institutions.
For e.g. the Credit Risk Modeling - Type I and Type II Operational Risk Failures and so on etc.

5. Other risk methods, applications and insights used in the context of Options Markets by financial engineers and risk managers can be discussed by the others!

But, again, please do not mix option pricing models with VaR Computational Methods per se.

Yes, VaR can help you compute the risk of an Options Exposure / Portfolio using the GREEKS! But the way you have framed the question can irritate and mislead our other readers.
Thank you !!

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