value at risk mgt 4850 spring 2009 university of lethbridge
Post on 20-Dec-2015
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Who can use VaR?
• Financial Institutions – not to expose themselves to expensive failure (Barings, Daiwa, Société Générale, Amaranth Advisors LLC)
• Regulators – Basel Committee
• Nonfinancial corporations (cash flow at risk)
• Asset Managers - funds
Steps in Constructing VaR
• Current portfolio value
• Measure the variability per year
• Set time horizon
• Set the confidence interval
• Report the worst loss
Definition
• The worst expected loss under normal market conditions over a specific time interval at a given confidence level.– Confidence level– Time period
• Example – daily VaR equal to $1mil at 1% (i.e. only one chance in 100 that a daily loss bigger than 1 mil occurs under normal market conditions)
• The probability density function of the normal distribution is a Gaussian function
• density function of the "standard" normal distribution:
Continuous compounding
• Exponential function ex
• Natural logarithm - ln(x)
• Mean value of a portfolio in 1 year:– ln(int. value) + (mean ret.+σ2/2)T
Now we need “loginv” function for the cutoff point
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