Financial Risk Management

With the experience of the recent failure of large financial institutions such as the Barings Bank, sufficient risks control measures are clearly essential and the regulators have started to set restrictions on limiting the exposure to market risks. Value at Risk context says that precise prediction of the probability of an extreme movement in the value of a portfolio is essential for both risk management and regulatory purposes. Value at risk has so far been the most popular in determining financial risk in financial institutions and most risk managers feel that it could have prevented financial disasters like Barings, Orange County and Sumitomo.
The Value at risk was developed in response to the financial disasters of the 1990s and obtained an increasingly important role in market risk management. Value at risk is a statistical measure of potential loss from an unlikely or adverse event in a normal market environment According to (Gencay. R,) "The Value at risk summarizes the worst loss over a target horizon with a given level of confidence. It is a popular approach because it provides a single quantity that summarizes the overall market risk faced by an institution or an individual investor". To be precise VaR is the maximum expected loss over a given horizon period at a given level of confidence. Investors are mostly concerned on how much money they lose, without having a clear idea on the maximum value they can lose, investors cannot determine if they are receiving the right benefits for the risk they are undertaking.
There are many methods to calculate VaR, which fit different market conditions, data set and precision requirements. There are some of the more popular and effective ones. Generally, we can classify them into three types
This method is based on the assumption that the short-term changes in the market parameters and in the value of the portfolio are normal. In this method, the market parameters are nondependent and are restricted to the first degree of dependence -correlation.&nbsp.