Value at Risk (VaR) is a risk measurement tool that estimates the maximum potential loss on an investment or portfolio over a specific time period, at a given confidence level, under normal market conditions.
Value at Risk (VaR) is widely used in banking, investment management, and risk management to quantify market risk. It answers a simple but powerful question:
“How much can I lose, at worst, over a certain period?”
VaR is expressed using three key components:
For example, a 1-day VaR of ₹10 lakh at 99% confidence means there is only a 1% chance that losses will exceed ₹10 lakh in one day under normal market conditions.
VaR helps institutions set risk limits, allocate capital, and comply with regulatory requirements. However, VaR has limitations—it does not predict extreme losses beyond the confidence level and should be used along with other risk measures like stress testing and scenario analysis.
"If a portfolio has a daily VaR of ₹5 lakh at 95% confidence, it means that on 95 out of 100 days, the portfolio is not expected to lose more than ₹5 lakh in a single day."