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VALUE AT RISK (Quantitative Risk Assessment), Fadhila Abidah …
VALUE AT RISK
(Quantitative Risk Assessment)
Value at Risk (VaR)
calculates the maximum loss expected (or worst case scenario) on an investment, over a given time period and given a specified degree of confidence.
Advantages
Easy to understand.
VaR is measured in either price units or as a percentage, making the interpretation and understanding of VaR relatively simple
Applicability.
Applicable to all types of assets – bonds, shares, derivatives, currencies, etc.
Universal.
VaR figure is widely used, so it is an accepted standard in buying, selling, or recommending assets
Limitations
Large portfolios.
The greater the number or diversity of assets in a portfolio, the more difficult it is to calculate VaR
Difference in methods.
Different approaches to calculating VaR can lead to different results for the same portfolio
Assumptions.
If the assumptions used as inputs are not valid, then neither is the VaR figure
VaR Methods
Historical method
Market data for the last 250 days is taken to calculate the percentage change for each risk factor on each day
Each percentage change is then calculated with current market values to present 250 scenarios for future value
The third worst day selected is assumed to be 99% VaR
Parametric method
(Variance-covariance method)
Assumes a normal distribution in returns
Two factors are to be estimated – an expected return and a standard deviation
Best suited to risk measurement problems where the distributions are known and reliably estimated
The method is unreliable when the sample size is very small
Monte Carlo method
VaR is calculated by randomly creating a number of scenarios for future rates using non-linear pricing models to estimate the change in value for each scenario, and then calculating the VaR according to the worst losses
Suitable for a great range of risk measurement problems, especially when dealing with complicated factors
Assumes that there is a known probability distribution for risk factors
Fadhila Abidah
09111840000092
Manajemen Risiko & Tata Kelola B