Alternative Approach Surplus VaR with correlation between Assets and Liabilities

[CFO2013]

Can the calculation be detailed for the Alternative Approach on the Investment PDF Document (page 26). I do not see how the result for Variance of surplus could be 190.44 $ with the data provided.

 

[David Harper CFA FRM]

Hi @CFO2013

This is the variation of SAR which gives volatility of both assets and liabilities; and provides the correlation between the two (the key hint) such that we are retrieving the variance of a difference: variance (S) = variance(A-L) = variance(A) + variance(L) - 2*vol(A)*vol(B)*correlation; i.e., the classic two asset variance formula which is re-applied (in the FRM generally here and to compute an ex ante tracking error). So, variance(S) = 120^2*12%^2 + 100^2*3%^2 - 2*120*100*12%*3%*0.30 = 190.44. I hope that helps! Thanks,

 

[CFO2013]

Many Thanks again David, all is now very clear to me.