what is Value at Risk (Var), and how can it help us?
First, Var is an amount of money which is what we mean when we ask how much we can lose. Second Var is an estimate. It is based upon probabilities, so we cannot rely upon it with certainty, but rather with a degree of confidence we select. Var is defined as the expected maximum loss (expressed in currency units) due to unfavorable movement of the underlying market factors that an asset or a portfolio of assets will suffer over a target horizon (T) within a given degree of certainty / confidence level (a ) selected by the decision maker. The Var concept embodies three factors. The first is given time horizon. A risk manager might be concerned about possible losses over one day, one week, one month, etc. Second, Var is associated with a probability. The stated Var represents the maximum possible loss over a given period of time with a given probability. Third, there is the actual rupee amount itself. Consider for example a dealer with an Rs 20 million position. He might find that his Var
