Question

Define Value at Risk (VaR) and how it is used in financial risk management

Answer 1

value at risk is a statistic that measures and quantifies the level of financial risk within a firm portfolio or position over a specific time frame.

this metric is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their institutional portfolios.

risk managers use var to measure and control the level of risk exposure. one can apply var calculations to specific positions or whole portfolios or to measure firm wide risk exposure.