Credible Delta Normal Value at Risk for Risk Evaluation of European Call Option

Abstract

This paper develops a Credible Delta Normal Value at Risk (CredDN) as a method to assess the options risk. The method is constructed by combining Credible Value at Risk (CrVaR) with Delta Normal VaR. The new method is initiated as an alternative instrument to measure the European call option portfolio risk. Using the Black-Scholes Formula, the new method contemplates the nonlinear dependence of the market risk factors specifying the value of a European call option. Then, utilizing simulated financial data that represents assets profit/loss over ten investment periods, we applicate the proposed method for analysis. The novel method is also employed to assess the portfolio’s risk consisting of the active stocks which are involved in option trading. The performance of CredDN in this study is evaluated by administering Kupiec backtesting. The results of Kupiec backtesting suggest that the proposed method effectively quantifies the risk of each option constructing a portfolio at 80%, 90%, and 95% confidence levels.