Beyond VaR: from measuring risk to managing risk

The paper examines tools for managing, as opposed to simply monitoring, a portfolio´s value-at-risk (VaR). These tools include the calculation of VaR contribution, marginal VaR and trade risk profiles. We first review the parametric, or delta-normal versions of these tools and then extend them to the simulation based, or nonparametric case. We analyze two sample portfolios: one, consisting of foreign exchange contracts, is well-suited for parametric analysis while the other, which contains European options, is best addressed with simulation based methods. The limitations of the simulation based approach, due to the potential effects of sampling error, are also discussed