Value at Risk

Powerful Essays
Initially, the VaR has been anticipating to quantify the available risks in derivatives markets, but it has grown widely and it has now been applied in measuring all kinds of risks, primarily credit and market risks. It also developed from a tool that quantifies risk to a tool that is applied in active risk management. Today VaR has shifted beyond application in financial institutions. In the beginning, companies with largely exposed to financial markets used other kinds of activities before spreading to other businesses. Today, an ever-growing numbers of individual businesses apply and appreciate VaR as an effective tool for quantifying financial risksKrause (2003). This trend is evidently aided by the fact that non-specialists easily understand VaR. The risks of the prevalent use of VaR are an overdependence on the results it gives, misconception, and even abuse. It is as a result that, essential individuals using VaR understand its problems and limitations. In this paper, I will explore in depth these constraints, which unluckily do not mark prominently.

To begin with, the VaR estimate is founded on precedent data, that is, it uses past distribution of effects of the investment. However, to calculate the peril of an investment, it is of no concern how big this risk has been in the earlier period, but fairly on how much exposure there is within the existing period; therefore, the future distribution of outputs would be the appropriate to consider. As long as the division of outcomes stays steady, the VaR can simply be removed from the past distribution. In reality, the distributions are not steady over time; most remarkably, the inconsistency of outcomes and the correlations vary. Relying exclusively on past data can as a result give a poor risk measure Oldfield, et al (2000).

Unluckily, even with this problem resolved, there lingers an issue with the evaluation of the VaR itself. Since the true probability circulation is not well known in general, it has

You May Also Find These Documents Helpful

  • Powerful Essays

    Value at Risk

    • 4802 Words
    • 20 Pages

    Definition of Value at Risk (VaR) Value at risk is a statistical technique which measures the level of financial risk in a portfolio over a specific time frame. For example, if a firm states that it has a 1% one week value at risk of $5 million; this would mean that for any given week, the firm would have a 1% chance of losing $5 million. In order words, 1 out of every 100 weeks, the firm would expect to have a loss of $5 million. This can be viewed as the standard deviation of portfolio value during…

    • 4802 Words
    • 20 Pages
    Powerful Essays
  • Powerful Essays

    Value at Risk

    • 6461 Words
    • 26 Pages

    different options (more is better) Introduction All financial institutions bear some sort of risk while dealing with different financial instruments, whether it be corporate treasurers, fund managers or financial institutions, they are all exposed to a certain market risks while carrying out their daily trading activities. There is a possibility that the institution makes a blunder in forecasting the future value of its trade and this may lead to major losses that have to be incurred by the institution…

    • 6461 Words
    • 26 Pages
    Powerful Essays
  • Powerful Essays

    1.0 Executive Summary This report is aimed primarily on the “Strategic Value Management” phase. This means the stages from developing the strategic brief to the decision to build to development of the project brief. SBE innovations Ltd (a Partnership formed between a private developer Arch Group Ltd and public sector local authority Cheddar City Council) desires to deal with their new development by building a mixed-use recreation and commercial centre. At the time of study the project was still…

    • 4833 Words
    • 20 Pages
    Powerful Essays
  • Powerful Essays

    Risk and net Present value

    • 7842 Words
    • 31 Pages

    Table of Contents 1.1 Introduction 1.2 NET PRESENT VALUE (NPV) 1.3 ADVANTAGES OF NPV 1.4 DISADVANTAGES OF NPV 1.5 PAYBACK 1.6 Arguments in favour of payback 1.7 Debt vs Equity 1.8 Equity equals Ownership (Share Profits and Control) 1.9 Debt: Money You Owe 2.0 ADVANTAGES OF DEBT COMPARED TO EQUITY 2.1 DISADVANTAGES OF DEBT COMPARED TO EQUITY 2.2 Managerial Ownership and Agency Costs 2.3 Concentrated Ownership and Agency Costs 2.4 Debt and Agency Costs 2.5 PECKING ORDER THEORY OVERVIEW…

    • 7842 Words
    • 31 Pages
    Powerful Essays
  • Powerful Essays

    2160 Kharbanda on Project Management The Value of Analysis and Risk Assessment Word Count: 7,909 net Executive Summary: The process of managing a project, large or small, is fraught with danger, especially for the project manager. Too many projects are undertaken without sufficient prior analysis of the needs of the ultimate customer, nor proper assessment of the anticipated risks. The odds of failure are enormous in any project. Knowing when to start, or when to cut-and-run, is as…

    • 9008 Words
    • 37 Pages
    Powerful Essays
  • Good Essays

    Annuities # 2 Time Value of Money (TVM) Understanding how the time value of money works can be most easily explained by taking your initial investment let us say $10 by the end of year five it could be worth $100. This means you have earned $90 in the last five years. Next year, you invest $10 and at the end of year five it is worth $80 because interest has not accumulated on the time that was lost between year 1 and year 2. My example of this is that my fiancé put $3000 in each of his…

    • 735 Words
    • 3 Pages
    Good Essays
  • Good Essays

    always says, "Take chances, make mistakes, and get messy!" She is stressing that not taking risks and, in turn, not making mistakes is nearly equivalent to not learning. If one wants to live a thrilling and, more importantly, fulfilled life, they need to take risks. Moreover, if one wants to become educated, they need to make mistakes. Alexander Smith once said, "Everything is sweetened by risk." Risk teaches us to weigh our options and decide which of those options is the most appealing, if not…

    • 547 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    Principal Component Value at Risk: an application to the measurement of the interest rate risk exposure of Jamaican Banks to Government of Jamaica (GOJ) Bonds Mark Tracey1 Financial Stability Department Research & Economic Programming Division Bank of Jamaica Abstract This paper develops an effective value at risk (VaR) methodology to complement existing Bank of Jamaica financial stability assessment tools. This methodology employs principal component analysis and key rate durations for…

    • 7587 Words
    • 31 Pages
    Powerful Essays
  • Best Essays

    Risk

    • 4337 Words
    • 18 Pages

    Risk This assignment will critically evaluate theories of risk, and consider the approaches to practice for the role of a local authority social worker in the identification, assessment and management of risk of social work with children, young people and families. There will be consideration given to the impact of social work practice on service users and carers including my understanding of anti-discriminatory and anti-oppressive practice. The idiom ‘damned if you do and damned if you don’t’…

    • 4337 Words
    • 18 Pages
    Best Essays
  • Good Essays

    RISK

    • 707 Words
    • 3 Pages

    is used a workstation risk assessment must be carried out. 2. Where laptops and notebooks are used as a significant part of day-to-day work a risk assessment must be carried out. 3. Work planned to include regular breaks from the computer. 4. Users of Display Screen Equipment should be informed of their right to a free eye test. 5. OHS leaflet “Are you keying safely” should be issued to DSE users. Manual handling of heavy/bulky objects (back injuries) L 1. A risk assessment must be completed…

    • 707 Words
    • 3 Pages
    Good Essays