VaR (Value at Risk) Calculation

Molecule VaR

Molecule's Value at Risk (VaR) engine provides a comprehensive risk assessment tool for energy trading portfolios. Developed and validated with industry experts, Molecule's VaR calculation offers robust risk metrics that account for various market complexities.

Key Features

Multiple VaR Methodologies

1. Monte Carlo: Simulates multiple full portfolio valuations under random, statistically sampled scenarios - No linearity assumption, which allows support of complex instruments and options - Computationally expensive, but very flexible

2. Analytical Approaches: - Delta-Normal: Fast calculation for linear portfolios - Delta-Gamma: Enhanced accuracy for portfolios containing a few options by accounting for convexity

Inputs and Calculation

• Only required inputs are positions (trade volumes) and market data

• System recalculates covariance matrix daily

• VaR updates in real time as positions change

Configurable

• Horizon - the number of days over which you are calculating VaR

• Confidence level - the probability that losses will not exceed the VaR amount over the specified horizon, a common confidence level is 95% (0.05) or 99% (0.01)

• Iterations for Monte Carlo VaR - how many simulations to run, typically start with 10,000

• Lookback period for covariance matrix - typically 90 days

Portfolio Insights

• Component VaR at book or counterparty level

• Calculation of diversification benefits

• Trade-level drilling capability

• Visualization of 30 Day backtest

Special Case Handling

• Spread Positions: Properly accounts for correlation between spread components

• Tolling Agreements: Models as options on spreads (typically spark spreads)

• FX Risk: Incorporates currency fluctuations in cross-border trading

• Quantity Uncertainty: Handles portfolios with variable quantities (e.g., load following)

Technical Validation

• Performs multiple methods (Monte Carlo, Delta-Normal, Delta-Gamma) as validation checks

• Developed with academic oversight from industry experts

• Robust calculation methodology for various portfolio types

Benefits

• Transparent: Analytical approaches allow insights into specific risk drivers

• Accurate: Monte Carlo simulation captures full portfolio dynamics

• Efficient: Fast calculation times even for complex portfolios

• Low Maintenance: Automatic updates without manual intervention

• Comprehensive: Handles various trading instruments and market complexities

Limitations

• There is currently no support for “what if” scenarios to see the impact that potential deals may have on VaR

• VaR calculations may not fully support some specialized instruments, including:

  • Exotics

  • Bespoke structures

  • PPAs, or generally trades that have both variable (formula) price and variable (dynamically shaped) volume

    • Update to include this trade type coming soon

• Hourly and Daily trades rarely have the required data history due to their short window they are alive, so typically VaR calculations are limited to monthly or longer tenors

Demo

To see a bite-sized demo of Molecule's VAR, visit https://molecule.io/resources/demos/understanding-var-calculation.html

You can fill out a short form and get immediate access.