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After completing this reading, you should be able to:
- Explain and give examples of linear and non-linear derivatives.
- Describe and calculate VaR for linear derivatives.
- Describe and explain the historical simulation approach for computing VaR and ES.
- Describe the delta-normal approach for calculating VaR for non-linear derivatives.
- Describe the limitations of the delta-normal method.
- Explain the full revaluation method for computing VaR.
- Compare delta-normal and full revaluation approaches for computing VaR.
- Explain structured Monte Carlo, stress testing, and scenario analysis methods for computing VaR, and identify strengths and weaknesses of each approach.
- Describe the implications of correlation breakdown for scenario analysis.
- Describe Worst-Case Scenario (WCS) analysis and compare WCS to VaR.