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VaR
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Bharat Khanna Limitations of VaR for Asset Optimization When is VaR effective? Value at Risk (VaR) is defined as the amount of money a firm is expected to loose at a specific confidence level over a specified time period. To say that the VaR for company is $100 dollars at a 95% confidence interval is the equivalent of saying that the firm is expected to loose $100 dollars 5% of the time over the specified time horizon. Putting it another way the firm will loose $100 dollars once in twenty days for a 1-day VaR. VaR can also serve as a measure of the amount of capital the firm has at risk. It can therefore be a powerful tool available to risk managers across a wide range of industries. The energy industry is an example where the use of VaR as a risk and control measure is widely accepted. Energy companies with large trading portfolios have used VaR to manage their daily risk profiles and also as a tool to make decisions about hedging strategies. Risk managers at these companies have used VaR to set and enforce risk limits and as a measure of individual and overall portfolio performance.
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