Var Risk Calculator

Value at Risk Formula:

\[ VaR = \text{portfolio\_value} \times z \times \text{std\_dev} \times \sqrt{\text{time}} \]

Portfolio Value:

currency

Z-Score:

z-score

Standard Deviation:

decimal

Time Horizon:

years

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 such as a day.

2. How Does the Calculator Work?

The calculator uses the VaR formula:

\[ VaR = \text{portfolio\_value} \times z \times \text{std\_dev} \times \sqrt{\text{time}} \]

Where:

\( portfolio\_value \) — Total value of the portfolio (in currency)
\( z \) — Z-score corresponding to the desired confidence level
\( std\_dev \) — Standard deviation of portfolio returns (as decimal)
\( time \) — Time horizon in years

Explanation: The equation calculates the maximum expected loss over a given time period at a specific confidence level, assuming normal market conditions.

3. Importance of VaR Calculation

Details: VaR is crucial for risk management, helping financial institutions determine the amount of assets needed to cover potential losses and for regulatory reporting.

4. Using the Calculator

Tips: Enter portfolio value in currency units, z-score corresponding to your confidence level (e.g., 1.645 for 95% confidence), standard deviation as decimal (e.g., 0.05 for 5%), and time horizon in years.

5. Frequently Asked Questions (FAQ)

Q1: What are common confidence levels and their z-scores?
A: 90% confidence: z = 1.282, 95% confidence: z = 1.645, 99% confidence: z = 2.326

Q2: How do I convert daily/weekly volatility to annual?
A: Multiply daily volatility by √252 (trading days), weekly by √52. For time in years, use directly.

Q3: What are limitations of VaR?
A: Assumes normal distribution, doesn't predict magnitude of extreme losses beyond confidence level, and can underestimate tail risk.

Q4: How should time horizon be selected?
A: Typically 1 day for trading, longer for portfolio management. Must match volatility measurement period.

Q5: What are alternatives to parametric VaR?
A: Historical simulation and Monte Carlo methods don't assume normal distribution but require more data/computation.