Value at Risk (VaR)
- Value at Risk (VaR) has become the standard measure that financial analysts use to quantify
- this risk.
- VAR represents maximum potential loss in value of a portfolio of financial instruments with a given probability over a certain time horizon.
- In simpler words, it is a number that indicates how much a financial institution can lose with probability (p) over a given time horizon (T).
- Say the 95% daily VAR of your assets is $120, then it means that out of those 100 days there would be 95 days when your daily loss would be less than $120. This implies that during 5 days you may lose more than $120 daily.
There may be a day out of 100 when your loss is $5000,
which means VAR doesnâ€™t tell anything about the extent to which we can lose