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?