What is VAR?

Value at risk is a measure of the value a portfolio might lose within a certain period in a variety of trading conditions. To manage risk, managers need a clear idea of their actual exposures. Value at risk is a very useful tool because it gives risk managers a picture of how sensitive a portfolio's amalgamated positions are likely to be to certain changes in prices, interest rates and exchange rates. VAR includes a level of confidence that the value at risk will not be exceeded, usually 95% or 99%. Value at risk thus gives risk managers a feel for the future. Because of its utility and the simplicity of one number that represents an entire portfolio's risk sensitivity, VAR is gaining wide acceptance as a standard measure of risk. But VAR has its limitations.