Value at Risk Definition. Value at Risk, or “VaR”, is a widely used quantitative measure in financial mathematics and financial risk management to create a value for the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time period, VaR is defined as the upper limit, or threshold value, that the marked-to-market loss on the portfolio over the given time horizon may exceed, given the set probability under normal market conditions with no trading in the portfolio. Critics feel the method is misleading and that assumptions are imperfect representations of reality. VaR is primarily utilized in finance, risk measurement, financial control, financial reporting and computing regulatory capital requirements. VaR is typically used to assess Market Risk. Market Risk is a term that describes the risk that the value of an investment or trading portfolio will decrease due to the change in value of certain market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. In each case, the risk is a measure of impact of a change in market price or of implied volatility in the futures market for the respective investment vehicle. Many attempts have been made to standardize market risk measurement, but all forms have the potential to mislead or give a false sense of security.
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