Value at risk
Value at risk or VaR is a probability-based measure of the loss potential of a company, a fund, a portfolio, a transaction, or a strategy.
It is usually expressed either as a percentage or in units of currency.
Any position that exposes one to loss is a candidate for VaR measurement. VaR is most widely used to measure the loss from market risk.
A company with a VaR of Rs 20 lakh at 5 percent probability in a given year will mean there is a 5 percent probability that the company will lose a minimum of Rs 20 lakh in that year.
VaR can be read as the minimum loss which is expected at a given probability for a given time period.
The most common way of calculating VaR is the variance covariance method. This method assumes that the return of the portfolio is normally distributed and can be completely described by expected return and standard deviations.