Navigating aftershocks of war and extreme volatility: the critical need for deep value-at-risk insights

Today’s markets face unparalleled uncertainty from factors such as war, inflation, supply chain disruptions, Covid’s after-effects, climate change, bank defaults, and protectionist policies. These conditions heighten volatility and the potential for black-swan events.

Trading companies must understand their portfolio’s value, driving forces, and risk-reward profile, assessing their resilience to shocks. These factors often dictate the success or failure of trading businesses. Now more than ever, having the right tools that provide this information is critical to this success.

In this article we look at a solution that equips risk managers with deep insights and enhanced decision-making capabilities enabling profit to be maximised whilst managing risk.

Lacima’s VaR solution provides insight into risk sources and drivers within a portfolio. Users can confidently explain daily VaR variations and understand risk profile shifts due to new trades. Stress testing and scenario analysis further enhance a risk manager’s toolkit. It offers:

• VaR calculations: compute various VaR types each with distinct insights.
• VaR drilldown: decompose a portfolio’s VaR into individual components.
• VaR attribution: assess the causes and impacts of changes in VaR.
• VaR greeks: standardise complex contracts in a VaR framework.
• Expected shortfall: estimate potential losses.
• Stress testing: evaluate risks under various scenarios.

Lacima Analytics>VaR empowers risk managers, traders, and senior executives to make informed decisions on risk, hedging, and portfolio management.

In the following example, we present a practical application of Lacima Analytics>VaR. In this illustration, there’s a significant shift in VaR, pushing it close to the desk’s prescribed limit.

The initial chart indicates that a modification in positions was the primary driver behind the jump in VaR. A closer look via the second chart reveals this stemmed from new positions in German power, initiated by Trader 1 and Trader 2. Armed with this knowledge, the risk manager is now in a position to confer with the traders and trading manager. Together, they can deliberate on potentially reducing or offsetting these positions to remain compliant with the VaR constraints.

To discover more about our VaR solutions, to request full analysis shown here or for a product demo, email info@lacimagroup.com.

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