Valuation at Risk Calculator

VaR Calculation Methods:

\[ \text{VaR} = \begin{cases} \text{Historical Simulation: Percentile of historical returns} \\ \text{Monte Carlo: Statistical simulation of potential outcomes} \end{cases} \]

Calculation Method:

Portfolio Value:

USD

Confidence Level:

Time Horizon:

days

Value at Risk (VaR):

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1. What is Value at Risk (VaR)?

Value at Risk (VaR) is a statistical measure that quantifies the level of financial risk within a firm, portfolio, or position over a specific time frame. It estimates how much a set of investments might lose, given normal market conditions, in a set time period.

2. How Does the Calculator Work?

The calculator uses two primary methods for VaR calculation:

\[ \text{VaR} = \begin{cases} \text{Historical Simulation: Uses actual historical return data} \\ \text{Monte Carlo: Uses statistical simulations of potential outcomes} \end{cases} \]

Where:

Portfolio Value — Current value of the investment portfolio in USD
Confidence Level — Probability threshold (95% or 99%)
Time Horizon — Number of days for risk assessment

Explanation: The calculator provides an estimate of potential loss based on either historical patterns or statistical simulations.

3. Importance of VaR Calculation

Details: VaR is crucial for risk management, helping financial institutions understand potential losses, set capital reserves, and make informed investment decisions.

4. Using the Calculator

Tips: Select calculation method, enter portfolio value in USD, choose confidence level (95% or 99%), and specify time horizon in days.

5. Frequently Asked Questions (FAQ)

Q1: Which method is better - Historical or Monte Carlo?
A: Historical is simpler but limited by available data. Monte Carlo is more flexible but depends on model assumptions.

Q2: What are typical VaR confidence levels?
A: 95% (1 in 20 chance of exceeding) and 99% (1 in 100 chance) are most common in financial risk management.

Q3: How does time horizon affect VaR?
A: VaR typically increases with the square root of time for normal distributions (√T rule).

Q4: What are VaR limitations?
A: VaR doesn't predict maximum loss, assumes normal markets, and can underestimate tail risk.

Q5: Should VaR be the only risk measure used?
A: No, it should be complemented with other measures like Expected Shortfall (CVaR) for tail risk.