How do you use the historical information?

We use historical closing prices as follows:

1. We collect the closing prices (OR rates) for various risk factors that affect the pricing of a security (rates, credit spread, FX, etc). We never use the historical prices of the securities themselves as their prices are not invariant (for example: as an option gets closer to its expiration the risk is very different from 6 months earlier)
2. We put more emphasis on more recent information
3. We build a sparse covariance matrix that is used to generate simulations
4. We fully reprice each security using the simulated risk factors and extract various risk statistics