Volume 3 — Valuation and Risk Metrics © Copyright 2002, CCRO. All rights reserved. 40 Step 8 Hierarchy of VaR Several hierarchies for VaR are possible, and analysis can be done and measured based on the particular type of risk measurement that is called for. The Hierarchy of VaR VaR Tenor VaR Asset VaR Region VaR Comm. VaR Tenor VaR Asset VaR Comm. VaR Tenor VaR Comm. VaR Region VaR tenor VaR Region VaR tenor VaR Asset VaR Asset VaR Region VaR Comm. Stress Tests Stress tests are subjective risk analyses that are carried out to examine the sensitivity of the value of the assets and other transactions to user-defined changes in the levels of the primary underlying variables, typically commodity prices and or volatilities. Approach (a) Full Evaluation — Given on exact measure to the underlying shock but is time consuming.This is the more accurate method to use. (b) Delta Equivalent — This is a cruder approach used when time is of the importance. In this method the asset positions are converted into their “delta equivalent” volumes bucketed by commodity, location, and tenor and the subsequent stress test analysis can be done applying the price shocks to those volumes, in the case of price stress tests. Because the analysis is a “value change” analysis, rather than a VaR type of analysis, it can be done very quickly and the bucketing of changes by commodity, location, asset, region, tenor, etc., can be very easily accomplished. This approach should only be used for small price changes, as it can potentially overstate or understate impact of shock. Market Year Definition Definition for Portfolio Identify Positions Report: Value Report: Changes in Value Volumetric Exposures Operating Margin at Risk Stress Tests 1 2 3 4 5 6 7 8