... and currency prices. The risk manager must then choose the appropriate method of calculating VaR. This could be Delta Normal, Historic Simulation, or Monte Carlo Simulation. Finally, when all the information and data is inputted, the VaR can be calculated. This essay will focus on how the principle methods of VaR are calculated and will explain the advantages and disadvantages of each. 2. Delta Normal Delta-normal method, also known as variance-covariance approach, relies on the normality assumption for the driving risk factors. The portfolio standard deviation (portfolio VaR) is a simple linear transformation of individual risk factors if all positions are linear in underlying risks. For the non-linear factors, such as bond and options, it works with linear approximations where the true positions are placed with linear approximations. To illustrate this method, first let us take an instrument whose value depends on a single underlying risk factor, S. The value of ...

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