Nov 29, 2023 - Rotterdam, The Netherlands

Article banner Image Value at Risk

Value-at-Risk (VaR) is a widely used risk management tool in finance that provides an estimate of the maximum potential loss an investment portfolio or trading position could incur over a specified time horizon at a given confidence level.

The confidence level represents the probability that the actual losses will not exceed the estimated Value-at-Risk. For example, a 95% VaR implies that there is a 5% chance that losses could exceed the estimated value.

Value-at-Risk is a critical tool in the commodity industry that provides a quantitative assessment of potential losses, helping users manage risk, make informed investment decisions, and allocate capital efficiently in a volatile market environment. It plays a crucial role in risk management and regulatory compliance within the industry.

Most appreciated advantages of Value-at-Risk

  • Quantitative = Objective: VaR provides a quantitative measure of risk, which makes it easy to communicate and compare risk levels across different assets or portfolios. This allows for more objective risk assessment and data-driven decision-making
  • Risk Aggregation: VaR can be used to aggregate risk across various asset classes and portfolios, providing a holistic view of risk exposure for an entire organization. This is crucial for businesses with diverse risk drivers such as different commodities, logistics, FX, and others
  • Portfolio Optimization: VaR can be integrated into portfolio optimization techniques, including hedge effectiveness. It aids in constructing portfolios that meet specific risk tolerance levels
  • Risk Communication: VaR is a valuable tool for communicating risk to both internal stakeholders (senior management, board of directors) and external parties (investors, regulators). It helps stakeholders make informed decisions about risk exposure

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Key components of Value-at-Risk

  • Ability to ingest from a multitude of data sources in various formats, both internal and external.
  • Handling all data regarding security, quality and normalization.
  • Support for 4 models:
    • Parametric Equally Weighted
    • Parametric EWMA
    • Monte Carlo EWMA
    • Historical
  • On Monte Carlo, support for Options VaR
  • Support for multiple VaR calculations
  • Configure each VaR calculation with different parameters for model, lambda, confidence, etc.
  • Calculate diversification across books and products.
  • Pre-calculate VaR driver – position, price and CoVaR changes
  • Automatic generation of VaR portfolios
  • Calculation of Expected Short-Fall
  • Support for absolute or relative returns
  • Drill down across portfolio and to individual positions
  • Early warning of large price variations
  • VaR Checker allows recalculation of VaR in Excel
  • Directly access VaR calculated data using out-the-box API
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Why RadarRadar Value-at-Risk?
  • Integration with Exposure Model: RadarRadar VaR is built on top RR Position & Performance engine, providing perfect integration of exposure modeling, PCAT and valuation engine
  • Enough with copy/pasting: RR VaR built-in data quality checks and integration with position and PCAT eliminates the needs for error-prone excel pre-treatment of the data
  • Drill-down, up, and sideways: Integration also means full data navigation capabilities, navigating from VaR numbers not only to sub-portfolios/diversification, but also trade/lot position details and/or return decomposition into futures, basis, differentials, etc.
  • Built for commodities: RR offer a set of industry-tested VaR models with out-of-box parametrization options to match trading-strategies
What do our clients say?
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