FRM FX skew in VaR Model

FX skew in VaR Model

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    • Avatar of FenilGalaFenilGala
        • FRM Certified

        Our client has been asked by the regulators to include FX Skew in their VaR model. The client has reached out to us to provide a one slide proposal about what are the steps required to deliver this change from definition to implementation/go live in client systems – Can you help me to draft the pointers

        sumeetpjaju voted upradhikab voted upvinaykar51 voted upasingh5310 voted uprashikhandelwal voted up
      • Avatar of elainemendozaelainemendoza
          • CFA Level 2

          It can be summarized as the following steps:

          • Identify risk factors.
          • Agreement with respective sources.
          • Start distributing Vega according to the agreements.
          • Summarize, calculate, and summarize based on the closing rate and DGV method.

          It’s all steps I can draft through my experience from the shell shockers project. You can reference. It can be suitable or not.

        • Avatar of MaryHopkinMaryHopkin
            • Undecided

            Certainly! Here are some pointers to include in your proposal for implementing FX Skew in the VaR model:

            Definition and Scope:

            Clearly define what FX Skew is and its relevance in the VaR model.
            Explain the regulatory requirement and its impact on the client’s systems.
            Requirements Gathering:

            Identify the specific requirements related to incorporating FX Skew into the VaR model.
            Conduct meetings and discussions with relevant stakeholders, such as risk managers, traders, and IT teams, to gather their input and understand their needs.
            Document all requirements in detail, including any specific calculations or data sources needed.
            Data Acquisition and Processing:

            Identify the necessary data sources for acquiring FX Skew information.
            Assess the availability, quality, and reliability of the data sources.
            Determine the frequency and timeliness of data updates required for accurate VaR calculations.
            Develop or enhance data processing pipelines to incorporate FX Skew data into the VaR model.
            Model Enhancement:

            Analyze the current VaR model and identify the components that need to be modified to accommodate FX Skew.
            Consider the impact of FX Skew on existing risk factors, correlations, and volatilities used in the model.
            Determine the appropriate mathematical models and algorithms required to incorporate FX Skew.
            Develop or modify the VaR model to integrate FX Skew calculations accurately.

            roller baller

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