FTR VaR (Value at Risk) Reimplementation


Our client was using a large Excel spreadsheet with multiple linked tabs to calculate value at risk (VaR). The client was not measuring VaR for any of its FTR positions. The volatility and correlation calculations were not properly weighted. In addition, the delta between the published price and the non-published price was not updated on a regular basis. The current process combined with the methodology of capturing VaR between two points (published vs. unpublished) did not comply with industry or statistical standards.


Our consultant provided a VaR reimplementation that involved capturing FTR positions as part of the existing risk portfolio. In addition, they created a workflow process that documented and explained the proper weighting of the volatilities and correlations required. As part of the deliverables, our consultant discussed the pricing methods needed to handle the FTR portfolio. These methods included handling the FTRs’ underlying metrics (i.e., total prices at source and sink, their volatilities, and the correlations between them) as opposed to only using the delta between the source and sink prices. The consultant provided guidance to the client in choosing a method of calculating Undiversified VaR and Diversified VaR, and worked with the client and third party software vendor to automate the VaR process within the application. This included everything from requirements gathering, solution choices/selection, implementation, testing, training, and go-live.


MidDel provided the client with an automated VaR model that adequately quantified the client’s VaR, including FTRs and details, which explained the data necessary to make those computations. This turn-key solution met the client’s requirements and was completed under budget. Executives and the Risk Committee received the resulting solution enthusiastically. Furthermore, this objective was seen as an enhancement for evaluation of overall market risk.

Request PDF