Table of contents
- About Values at risk
- How the Values at risk represented?
- What are the advantages of Values at Risk?
- What are the Limitations of Value at Risk?
- What are the facts related to the values of risk?
- What is a useful method to calculate the values at risk?
- What are the types of Value at Risk?
- How Values at risk useful?
- About Values at risk
It is the simple calculation of a financial metric that estimates the risk of an investment. It is a static technique used to measure the amount of potential loss that can happen in the investment for a specified period. It gives probability to measure the loss calculated as per the investment.
2. How the Values at risk represented?
It is a simple curve that gives the hypothetical profit and loss of the investment using density function. It has a mean and standard deviation.
3. What are the advantages of Values at Risk?
There are different advantages of the calculation of Value at Risk.
- Easy to Understand:-
Value at risk is the single number represents the extent of risk in a given portfolio. It is measure in price unit or percentage. It makes the interpretation and understanding of VAR simple.
Value at risk applies to all types of assets like shares, derivatives, currency bonds, and many more. It is used by many of the banks to calculate the profit, loss, and risk of investment. Banks can allocate risk based on var.
The values at risk are to accept the standard buying, selling, and recommending asset.
- Available in Software:-
VAR is available in the software. One can enter the holding & setting a few parameters will give you calculation.
- Decision Making:–
The expert from all over the world uses VAR to calculate the loss and profit. It helps to make a decision.. .4
4. What are the Limitations of Value at Risk?
- Large Portfolio:-
The large portfolio decided with profit and loss. Hence for the correlation between two portfolios. The diversity between the portfolios is more complex to calculate the VAR. It fails to give an idea about the loss-related tail of the probability distribution.
The same method should use to calculate VAR. Various types of methods of calculation could lead to a different result.
Calculating VAR requires calculations with some assumptions. They use as input. If the assumption is not valid the VAR figure is also not valid.
5. What are the facts related to the values of risk?
- It gives a specified amount of loss in values or percentages.
- Time at which the risk is calculated.
- It gives a confidence interval.
6. What is a useful method to calculate the values at risk?
There are a total of 3 methods to calculate the VAR
- Historical Method:- It is a simple method to calculate the values at risk. The data for 250 days taken to calculate the percentage change in each of the risks each day. The percentage change is calculated with the current market value and represented with the 250 scenarios. For each of the scenarios, the portfolio is value using the full and non-linear models.
- Parametric Method:- The parametric method is the variance and covariance method. It is the best method for the measurement of problem where distribution is estimated. This method is unreliable when the data available is very small. It assumes the normals distribution value in return
- Monte Carlo Method:- In this method, the VAR calculated by creating a random of the scenario for the future rates by using no linear pricing models. It uses to calculate the change in the values for each scenario and then calculate the VAR as per the worst loss. This measurement is useful for the long-term risk of the measurement problem, especially when dealing with complicated factors. It is the assumption that there is a known probability distribution for the risk factor.
7. What are the types of Value at Risk?
There are two types of values at risk
1. Marginal Value at Risk (Mvar):-
The marginal value is the additional amount of risk added with the new investment in the portfolio. Mvar helps the fund manager to understand the change in a portfolio due to subtraction and addition for a particular investment. An investment may have a high-risk value if the relationship with the portfolio is less it may contribute to the lower amount of risk to the portfolio. The value of risk is much less as compared to the alone risk calculation.
2. Incremental Value at Risk:-
Incremental values at risk is the amount of uncertainty added or subtracted from the portfolio standard deviation. It also includes the individual investment rate of return and portfolio share. The portfolio share is the percentage of a portfolio of the individual investment represent.
3. Conditional Value at Risk:-
The Cvar includes expected shortfall, average values at risk, tail VAR, mean loss or mean shortfall. Cvar is an extended version of var. it useful to calculate the losses that occur beyond the values at the risk point in the distribution. The smaller value Cvar consider as better.
8. How Values at risk useful?
Value at risk is sometimes used in non-financial tasks or work as well. It uses in the following risk management, computing the regulatory capital, financial reporting, and financial control.
Value at risk use to calculate the loss by investment. Sometimes the value at risk is used in non- financial tasks.