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Viva lost vegas

Brett Humphreys discusses the problems of calculating true value-at-risk on aconcentrated options portfolio – in particular, the various pitfalls thatcan befall a risk manager in ignoring vega risk – and considers ways ofhandling these issues

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A risk manager is having an argument with his trading group. In a rare moment of honesty, the trading group says that because the company’s value-at-risk (VAR) calculation does not include vega risk1 and its portfolio contains a large number of options, the calculated VAR number is probably too low. The risk manager knew that vega was ignored, but always believed that vega risk was minor

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