VaR with Futures

[Binglebongle]

Am fairly new to VaR, but I do understand how it is supposed to work for say basic stock prices historically. However how is VaR calculated when there is a forward curve of prices, as for example with Futures? The only method I can think of is taking every price for a delivery/expiry date for an underlier and converting them to time to expiry and then seeing the % change to the next day. For example a 3 month contract on the 1st of Feb and comparing it with a 3 month contract on the 2nd Feb. Then also doing this for a 1 month contract and in fact all forward contracts. Is this right?

 

[Colin_Edwards]

I am afraid there isn't a simple answer. Many futures will represent physical commodities which will potentially have seasonality; for example, a corn future before the harvest and one after the harvest might be pretty different beasts. Just using the contract itself isn't so great either: physical contracts become more volatile as you get closer to maturity (long term prices are driven by macro-economic trends, short term prices due to dock-workers strikes!) You will almost certainly need to model that as two exposures (a constant maturity, seasonally adjusted series... and some series specific term.) Something like an interest-rate future which doesn't exhibit seasonality would work better in the approach you describe (Although you still need to pay attention to what happens when you change from one contract to another; you may need to do something to smooth that out.)

 

[Binglebongle]

Only just read this as have been away. Great reply thanks!

 

[Binglebongle]

I can see that seasonality will get complicated, but your last point "you still need to pay attention to what happens when you change from one contract to another; you may need to do something to smooth that out" - what do you mean by changing from one contract to another?