Financial Education

Value at Risk (VaR) has come to be regarded as the premier risk management technique for the financial industry. It measures the probability-based measure of potential loss that can be measured for specific transactions, business units or the total enterprise.

VaR estimates the loss in money terms that could be exceeded (i.e. it represents the minimum loss) at a given level of probability. For example, a $5 million one-day VaR at 5% indicates a 5% chance that losses could exceed $5 million on a given day.

All else equal, a higher loss has a lower probability of occurrence. Likewise, reducing the probability level from 5% to 1% (the two most common levels in use) would result in a higher VaR at the lower probability level.

For more information, see all articles on: Asset Allocation, Governance, Portfolio Management, Risk Management

See also:

Forming an Investment Risk Objective

Enterprise Risk Management

Using Derivatives to Hedge Different Types of Credit Risk

Investment Objectives

Criteria For Selecting a Fixed Income Index