The purpose of this thesis is to evaluate the market risk of insurance companies using VaR(Value at Risk) method and to see whether put option can reduce VaR value when it is included in the portfolio which has some stocks. This study not only calculates VaR values of the insurance companies, but also finds which method is the most useful one by doing back testing.
We can use historical simulation method easily because it does not require many efforts and time. But historical simulation method does not reflect recent changes in the market.Variance-Covariance method assume log-normal distributions of risk factor changes. Variance-Covariance method reflects more rapidly recent changes in the market, but it sometimes overestimates VaR values. Monte-Carlo simulation method requires many efforts and time. But, through the back-testing it is revealed that Monte-Carlo method is the most powerful one. Using put option, we can reduce VaR value of the portfolio which has some stocks.
Nowadays it is necessary to manage market risks within a controllable limit. In the tide of recent rapid market changes, financial institutions should have the tools by which they can manage market risks.
