var-brief.pptx

8/16/2019 VAR-BRIEF.pptx

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2/19

Value at Risk (VaR)•

VaR is a concept that attempts toanse! the "uestion# $%hat isthe potential loss in &alue o' a !isk

asset that can occu! o&e! aspecie* pe!io* o' time+

• VaR 'ocuses on the *onsi*e

impact o' !isks an* the possilelosses pa!ticula!l a!isin out o'*isast!ous *e&elopments in the !isk

'acto!s that ha&e a lo p!oailit


3/19

VaR# Concept

• VaR is a "uantit that in*icates the potential

loss in &alue o' an asset o! a po!t'olio o' assetsthat can occu! o&e! a specie* pe!io* o' timeith a i&en p!oailit (con*ence le&el)

•

VaR can e use* to measu!e the !isk e/posu!eo' an asset, a po!t'olio o' assets o! a !m itsel'.

• ene!all use* anks nancial se!&icescompanies to assess the potential loss in &alue

o' thei! usiness assets !m &alue *ue toa*&e!se chanes in ma!ket !isk 'acto!s o&e! aspecie* time pe!io*.


4/19

VaR# Concept

• 3his potential loss is compa!e* iththei! a&ailale capital cash !ese!&es ino!*e! to assess hethe! the losses cane co&e!e* ithout en*ane!in the

su!&i&al o' the !m• t has th!ee 'un*amental components# a

specie* le&el o' loss in &alue (the VaR),

a con*ence inte!&al (p!oailit) an* aspecie* pe!io* o' time o&e! hich !iskis assesse*


5/19

VaR# Concept

• n its most common uses VaR iscompute* on the asis o' the

ma!ket !isk 'acto!s such as inte!est!ate !isk, stock ma!ket &olatilit an*economic 'acto!s

•Hoe&e! the *enition o' !isk cane e/pan*e* o! cont!acte* tocompute VaR 'o! specic pu!poses


6/19

VaR# Concept

VaR 5tatement#

• 3he -*a 78 VaR is V

eanin o' VaR 5tatement#

•

3he!e is :7; pe!cent p!oailit thatthe loss in asset &alue in the ne/t:; *as ill


7/19

VaR# Concept

eanin o' VaR 5tatement#

• :V; is the VaR o' the asset

•

t is a 'unction o' to pa!amete!s# 3imeho!i=on :; *as Con*ence le&el (78)

• t is the loss le&el *u!in an :; *ape!io* that has a p!oailit o' (100 > 7)8 o' ein e/cee*e*

• ?ank !eulations !e"ui!e# @ 10 , 7 @99


8/19

VaR# Concept

Aue# B/plain the VaR statement#

3he -*a 9D8 VaR o' a po!t'olio is

Rs. 100 m.


9/19

VaR# Concept

Aue# B/plain the VaR statement# 3he -*a 9D8 VaR o' a po!t'olio is Rs.

100 m.

Ens# 3he!e is 9D8 p!oailit that o&e! a-*a pe!io* the loss in &alue o' the

asset ill not e/cee* Rs. 100m.B"ui&alentl# 3he!e is D8 p!oailit that

o&e! a -*a pe!io* the loss in &alue o'

the asset ill e/cee* 100m


10/19

Calculatin VaR# ?asisFist!iution o' Chane in Go!t'olio Value#

• Fist!iution o' chane in po!t'olio &alueo&e! ne/t :; *as is const!ucte* (&echanes in po!t'olio &alue a!e p!otsI

-&e chanes a!e losses)• o! a con*ence le&el (p!oailit) o' 7

8 , -Fa VaR is the chane in

po!t'olio &alue (loss) that co!!espon*s to(100 > 7)th pe!centile o' the *ist!iutiono' Chane in po!t'olio &alue o&e! thene/t *as.


11/19

Calculatin VaR# ssues

• Volatilit is ene!all e/p!esse* inte!ms o' pe!centae chane in &alue o'

asset pe! annum (5F o' !etu!ns 'o! 1ea! pe!io*)

• o! an -Fa VaR &olatilit has to e

e/p!esse* in te!ms o' chane in &alue'o! an -Fa pe!io* (5F o' chane in&alue 'o! an -Fa pe!io* )

•

mpo!tant !elation# NVaR Day-1VaR day- N ×=


12/19

Calculatin Fail Volatilit

• o! calculatin VaR annual &olatilit(K L )has to e con&e!te* to *ail

&olatilit (KF ). Met :n; e the eNecti&eno. o' usiness *as in a ea!.

• 3picall# n @ 2D2

n

σ σ

Y

D =


13/19

VaR# Bstimation Epp!oaches

1. Histo!ical 5imulation

2. onte Ca!lo5imulation

O. o*el ?uil*in


14/19

1. Histo!ical 5imulation Epp!oach

•

Histo!ical *ata is collecte* on chanes inma!ket &a!iales that aNect po!t'olio&alue

•

3he lone! the histo! the !eate! the no.o' possiilities o! scena!ios 'o! the'o!ecast pe!io*

•o! the 'o!ecast pe!io* chane in po!t'olio&alue is calculate* 'o! all possilescena!ios in the histo!ical *ata

•o! a VaR o' 7 con*ence le&el (100 >

7)th pe!centile *ata point is the estimate


15/19

2. onte Ca!lo 5imulation

•

E stochastic p!ocess 'o! the nancial&a!iales is specie*

•G!ice chanes o' all the un*e!lin

&a!iales a!e simulate*• n each simulation !un chane inpo!t'olio &alue is estimate*

•

an simulations a!e !un to et a!easonal la!e *ist!iution o' chanesin po!t'olio &alue

•

3his *ist!iution is use* to calculate VaR


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O. o*el ?uil*in Epp!oach

•Essumes that in*i&i*ual asset!etu!ns a!e no!mall *ist!iute*ith e/pecte* &alue =e!o knon

5.F.• Go!t'olio &alue is a linea!

comination o' asset !etu!nsIhence no!mall *ist!iute*

• o!ecasts o' &olatilit

co!!elations amon asset !etu!ns


17/19

5teps in Calculatin VaR

1. Con&e!t &olatilit pe! annum to &olatilitpe! *a (in pe!centae te!ms)

2. Con&e!t &olatilit pe! *a in pe!centaete!ms to &olatilit pe! *a in &alue te!ms

O. Calculate 1-Fa VaR usin the !ele&antcon*ence inte!&al (p!oailit)

4. Con&e!t 1-Fa VaR to -Fa VaR usin the!elationship specie* ea!lie!


18/19


•5inle Esset Case•2-Esset Case

•Minea! o*el


19/19


5inle Esset Case#•B# p46PHull

2-Esset Case#

•

B# p46QPHullMinea! o*el# p469PHull

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