How do I choose the right time series for VaR on futures contracts?

Question

AcadiFi · Accepted Answer

Futures VaR needs a time series that represents the risk of the current exposure. The nearby contract is liquid and observable, but it jumps from one contract to the next as expiration approaches. A constant-maturity series smooths the maturity target, but it requires interpolation and may not match the exact instrument held. For commodities, seasonality and delivery-month behavior can make this choice especially important.

Suppose Silver Ridge Commodities holds a portfolio of crude, gas, and equity index futures. For equity index futures, a nearby series may be adequate because roll behavior is relatively stable. For natural gas, the nearby contract can be heavily affected by seasonality and storage expectations. A constant-maturity approach may better represent a stable risk horizon, but it must be built carefully.

```mermaid
flowchart TD
  A[Futures position] --> B{Risk series choice}
  B --> C[Nearby contract]
  B --> D[Constant maturity]
  B --> E[Custom mapped curve]
```

The FRM takeaway is that futures are not just spot assets with different labels. Contract selection, roll rules, liquidity, and seasonality all affect the VaR input. The best series is the one that matches the position's economic risk and can be defended consistently. On the exam, also state the horizon, confidence level, data source, modeling assumption, and validation step, because those choices usually explain why two reasonable VaR answers differ materially. Practice more in our FRM question bank.

How do I choose the right time series for VaR on futures contracts?

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