The value at risk (VaR) represents the potential loss in value of a position (expressed as a net present value) that could – with a certain probability – be realized before the position is hedged or liquidated. The VaR evaluation is thus an extension of NPV analysis, which has the benefit of allowing a standardized approach to risk quantification. The difference between the two types of evaluation is that VaR takes into account the uncertainty of future market developments.

An NPV approach is used throughout the VaR evaluation, allowing the VaR to be consolidated across all sub-areas of the enterprise. You can freely aggregate the risk from products, currencies, and organizational units, and bring the results together to establish the total risk. Value-at-risk analysis is therefore of key significance for an enterprise’s global risk controlling activities.

Within the framework of risk management, VaR represents a target figure for controlling. The value at risk therefore forms the basis of the internal risk controlling models proposed by the Basle Committee on Banking Supervision. Keep in mind, however, that the final decision about which operative controlling measures are appropriate has to be made by the risk controlling department of your enterprise. As a key figure, VaR only has a warning function.

Risk/Return control represents a further use of VaR analysis. In modern portfolio management, expected yields are viewed in relation to the respective risks involved.

In principle, the value at risk is determined by the value of the position entered into and the volatility of market prices. The value at risk is also influenced by the average retention period of the position, that is, the time it takes for the position to be hedged or liquidated. The following calculation methods are used for VaR: