The delta-normal VAR method cannot be expected to provide an accurate estimate of true VAR over ranges where deltas are unstable. That would occur when options are at-the-money. Deep-out-of-the-money and deep-in-the-money options have relatively stable deltas. Over those ranges, the relationship between the value of the underlying instrument and the value of the option is very much like a forward currency contract. The delta-normal VAR can be calculated by assessing the volatility of the underlying spot prices and the correlation between the price of the option and the spot price. |
