Asset managers – derivatives

In calculating the VaR of a portfolio that contains derivatives the EMA system uses pricing models to estimate the return of a derivative based on the estimated price of the underlying asset(s) within each simulation.

As the pricing of some derivatives is a non-linear function of the prices of the underlying assets this approach ensures that the distribution is calculated correctly. Where a portfolio has material exposure to derivatives of this type the overall distribution will be non-normal with fat or thin tails as appropriate.

Combined with EMA’s FASTVaR forward looking volatility forecasts this approach enables the manager to comply with the EU’s UCITS legislation and respond quickly to changes in portfolio risk profile.