Mapping Options

[humheehum]

Hi David,

On page 159 of the BT notes on Market Risk - could you please elaborate on how do we decide on which asset are we long on and which asset do we short ? I have not quite understood this eg:- how do I know for a currency forward I should short a T-bill or short a 12 month bill in case of FRA ? Similarly for the options.

Thanks for your help

Regards,
Ashim

 

[David Harper CFA FRM]

Hi Ashim,

I think GARP needs to clarify the role of VaR mapping in the cirriculum, because it is a deep topic with much to learn. Yet the exam coverage is unclear: Chapter 11 is assigned but there are no calculations only concepts ("discuss," "explain"...). It is unclear how much time/preparation should be spent here. It is possible to over-prepare on Mapping. I respond this way b/c, unlike some other questions, there is no quick, direct answer.

Please note I did a screencast series on mapping, based directly on Jorion 11. You will see that, in most cases, the answer to your question (which asset? which direction) is starts with the pricing/valuation formula. You'll see this for example in the forward currency example below; we take the formula for a currency forward and we do the mapping by extracting the pieces. The factors that determine instrument price the instrument's risk factors. Maybe you can take a look and see if we need follow-up? David

I Mapping a fixed income portfolio (Intro VaR Mapping) – 8 min screencast
http://www.bionicturtle.com/learn/article/mapping_a_fixed_income_portfolio_intro_var_mapping_8_min_screencast/

Bond price returns VaR as bond risk - 8 min screencast
http://www.bionicturtle.com/learn/article/bond_price_returns_var_as_bond_risk/

Un-diversified bond portfolio VaR – 9 min screencast
http://www.bionicturtle.com/learn/article/un_diversified_bond_portfolio_var_9_min_screencast/

Diversified VaR of Bond Portfolio – 9 min screencast
http://www.bionicturtle.com/learn/article/diversified_var_of_bond_portfolio_9_min_screencast/

Risk factors in a forward currency contract (Market Risk: VaR Mapping) – 7 min screencast
http://www.bionicturtle.com/learn/article/risk_factors_in_a_forward_currency_contract_market_risk_var_mapping_7_min_s/

Mapping a stock option – 9 min screencast
http://www.bionicturtle.com/learn/article/mapping_a_stock_option_9_min_screencast/