Option Portfolio Value at Risk Using Monte Carlo Simulation Under a Risk Neutral Stochastic Implied Volatility Model

This paper calculates option portfolio Value at Risk (VaR) using Monte Carlo simulation under a risk neutral stochastic implied volatility model. Compared to benchmark delta-normal method, the model produces more accurate results by taking into account nonlinearity, passage of time, non-normality and changing of implied volatility. Two parameters in the model: the correlation between underlying and the at-the-money implied volatility and the volatility of percentage change of the at-the-money implied volatility, can explain market skew phenomena quite well