What are value-at-risk limits in finance?

What are value-at-risk limits in finance?

Value-at-risk (VaR) limits are thresholds set by financial institutions to quantify the potential loss in value of an asset or portfolio over a defined period for a given confidence interval.

How are these limits calculated?

VaR limits can be calculated using historical data, variance-covariance methods, or Monte Carlo simulations to assess potential losses.

Why are VaR limits important?

VaR limits help institutions manage risk by providing a clear measure of potential losses, ensuring they maintain adequate capital reserves.

What happens if the limits are breached?

If VaR limits are breached, it typically triggers a review of the portfolio, and risk management strategies may be adjusted to mitigate further losses.

Can VaR limits be adjusted?

Yes, VaR limits can be adjusted based on changes in market conditions, risk appetite, or regulatory requirements.