169 The Model-Building Approach The main alternative to historical simulation is to make assumptions about the probability distributions of return on the market variables and calculate the probability distribution of the change in the value of the portfolio analytically This is known as the model building approach or the variance-covariance approach Options, Futures, and other Derivatives, 5th edition 2002 by John C. HullOptions, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 16.9 The Model-Building Approach • The main alternative to historical simulation is to make assumptions about the probability distributions of return on the market variables and calculate the probability distribution of the change in the value of the portfolio analytically • This is known as the model building approach or the variance-covariance approach