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 the parametric VaR formula:

Where:

• \( Mean \) — Expected return (decimal)
• \( Z \) — Z-score corresponding to confidence level
• \( SD \) — Standard deviation of returns (decimal)
• \( Amount \) — Portfolio or position value in USD

Explanation: The formula calculates the potential loss in value of a risky asset or portfolio under normal market conditions.

3. Importance of VaR Calculation

Details: VaR is widely used by financial institutions to measure the market risk of their asset portfolios, and by regulators to determine capital requirements.

4. Using the Calculator

Tips: Enter the expected return as a decimal (e.g., 5% = 0.05), Z-score (e.g., 1.645 for 95% confidence), standard deviation as decimal, and the portfolio amount in USD.

5. Frequently Asked Questions (FAQ)

Q1: What are common confidence levels and Z-scores?
A: 95% confidence = 1.645, 99% confidence = 2.326, 99.9% confidence = 3.090.

Q2: What time period does VaR typically use?
A: VaR is typically calculated for 1-day or 10-day periods, though any time frame can be used.

Q3: What are the limitations of VaR?
A: VaR doesn't estimate potential losses beyond the confidence level and assumes normal market conditions.

Q4: How is standard deviation calculated for VaR?
A: It's typically the historical standard deviation of portfolio returns over the chosen time horizon.

Q5: What's the difference between parametric and historical VaR?
A: Parametric VaR uses statistical parameters (mean, SD) while historical VaR uses actual historical return data.