I would like to calculate historical Value at Risk for a portfolio that includes both long and short positions in forward contracts.

The part that confuses me is that I wonder whether the VaR of the different positions should better netted or summed up.

For example, I purchased a December contract and sold another contract for same delivery month. If VaR on the long position is 1000 usd and sales is also 1000 usd, can I net them?

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    $\begingroup$ Please clarify your question and correct the typing. $\endgroup$ – Ric Dec 4 '14 at 12:12
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    $\begingroup$ My god it wasn't easy to get something out of this question. $\endgroup$ – SRKX Dec 5 '14 at 9:51

I must say that I'd advise you not to use this kind of concepts if you don't really understand what VaR is and how it should be used, which seems to be the case here.

In short, if you bought and sold the same amount of the same contract then obviously you are not exposed to market risk anymore. So intuitively you expect you risk (and hence your VaR) to be 0.

However, this doesn't mean that you can net the VaR of different position in all cases. In fact you can't most of the time when you're not talking about the same asset. The reason is simply that correlation gets in the picture. What you need to do is to consider your global portfolio and estimate VaR from historical results.

  • $\begingroup$ First of all i extend my apology for the question . please note that i am new to VaR subject . still I disagree with your comment of netting of the buy and sell on the same asset as i clearly mention my portfolio is a commodity based . Your solution makes sense for Fx position . Physical trade (Buy/sell with supply chain) how can you nett off FOB-CIF position . $\endgroup$ – user1131338 Dec 8 '14 at 2:59
  • $\begingroup$ @user1131338 your comments are very difficult to understand really. But in short, by "same contract" I meant "same everything". If you're trading commodity futures, which are standardized, then you're fine. Otherwise you have to consider the global approach I mentioned afterwards, indeed. $\endgroup$ – SRKX Dec 8 '14 at 3:05

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