Topic 9 VAR - Nov2017.pptx - BAFI 1029 Risk Management...

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BAFI 1029 Risk Management Topic 9: Value at Risk
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Value at Risk VaR measures the worst expected loss under normal market conditions over a specific time interval at a given confidence level. As one of our references states: VaR answers the question: how much can I lose with x% probability over a pre-set horizon. 01/01/2015 RMIT University©2015 Schoolof Economics, Finance and Marketing 2
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Uses of Value at Risk The purpose of any risk measurement system and summary risk statistic is to facilitate risk reporting and control decisions. The simplicity of VaR measurement greatly facilitates dealers’ reporting of risks to senior managers and directors. 01/01/2015 RMIT University©2015 Schoolof Economics, Finance and Marketing 3
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Uses of Value at Risk VaR also proved useful in dealers’ risk control efforts. VaR is also used regularly by nonfinancial corporations, pension plans and mutual funds, clearing organisations, brokers and futures commission merchants, and insurers. 01/01/2015 RMIT University©2015 Schoolof Economics, Finance and Marketing 4
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VaR-Based Control Many value risk managers have risks arising mainly from agency transactions. VaR can assist such firms in monitoring their customer credit exposures, in setting position and exposure limits, and in determining and enforcing margin and collateral requirements.
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