Value at Risk

by Manshu on May 6, 2008

in Articles

Most lenders including financial institutions use the value at risk assessment to determine how much risk is involved in a given scenario. Since they are in business to make money, they have to reduce the amount of risk they involve themselves in. Losing money due to people not paying what is owed can result in them going under as well. With the value of risk they can assess the probability of loss that could occur over a given frame of time.

It is commonly referred to as the VaR by many institutions. There are many factors that play into it, so the results can be quite different from one time period to the next. How volatile the market is at a given time will play a huge role in the VaR. There are several different tools that institutions use to calculate the VaR, but all of them will give them similar results.

However, the VaR also gets plenty of criticism in the market. Many complain that such predictions aren’t always a fair indicator of how they will repay what they borrow. Therefore they feel they are being penalized for what has taken place in history rather than based on their own merit.

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