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Advantages & Disadvantage


  • Unlike Parametric VaR, it uses full pricing models and can therefore capture the effects of nonlinearities.
  • Unlike Historical VaR, it can generate an infinite number of scenarios and therefore test many possible future outcomes.


  • The calculation of Monte Carlo VaR can take 1,000 times longer than Parametric VaR because the potential price of the portfolio has to be calculated thousands of times.
  • Unlike Historical VaR, it typically requires the assumption that the risk factors have a Normal distribution.


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