Value-at-Risk (VaR) Introduction

Value-at-Risk (VaR) Introduction

Any transaction undertaken by a bank carries an element of risk. Value-at-risk, or VaR, quantifies the probability of loss to a dollar value. Moorad shows how this is achieved using the variance-covariance method.
Overview

A bank will wish to estimate the extent of its risk exposures so that it can better manage its P&L account, and gain an accurate estimate of its future capital requirements. VaR is a methodology that can be used to value this risk exposure. VaR measures the potential loss in market value of a portfolio using assumed or estimated volatility.

Key learning objectives:

  • What is VaR?

  • What are the main VaR methodologies?

  • How do we calculate VaR using the variance-covariance method?

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