Value at Risk is a methodology for estimating market risk. Value at Risk (also commonly referred to as VaR) is a category of risk measures that describe probabilistically the market risk of a portfolio of liquid (tradeable) assets. VaR is widely used by banks, securities firms, commodity and energy merchants, and other trading organizations such as hedge funds. Such firms could track their portfolios' market risk by using historical volatility as a risk metric. They might do so by calculating the historical volatility of their portfolio's market value over a rolling 100 trading days. The problem with such an approach is that it would provide only a retrospective indication of risk. The historical volatility would illustrate how risky the portfolio had been over the previous 100 days. It would not necessarily provide an indication of how much market risk the portfolio was taking today. For companies and financial institutions to effectively manage risk, they must know about risks while these risks are being incurred. If a trader mis-hedges a portfolio, the firm needs to be aware of that before a loss is incurred. VaR gives institutions a means to do that. Unlike retrospective risk metrics, such as historical volatility, VaR is prospective. It quantifies market risk while the risk is being taken. Risk Limited can assist you and your organization in VaR requirements and developing models that meet best practices standards for valuation and risk management. Contact Risk Limited if you need information or if we can be of assistance to you on Value at Risk issues. Click to go directly to the Risk Limited glossary to see other Value at Risk terms and definitions: Risk Limited Glossary Click on bar below to close this Value at Risk VaR display window. |
