Explain the VaR framework and its utility in Risk Management Essay

Explain the volt-ampere framework and its utility in Risk Management - Essay Examplevar can be said to be an easy method of measuring the market risk. As of date, VaR technology has spread its wings well beyond monetary derivatives and is completely transforming the style the financial institutions approach to their financial risk. Initially, VaR is occupied to measure the market risk, but now it is being giveed to administer and control risk actively. The VaR methodology is now assisting the industry to reckon both operational and credit risk, resulting in the sangraal of companywide management of risk1. (Jorion 2009 x). VaR employs a method of valuation of risk that uses ensample statistical methods employed regularly in other technical sectors. In simple terms, VaR can be explained as the most speculative qualifying over an objective horizon that will not be surpassed with a given level of confidence. Footed upon the companys scientific founding stones, VaR offers users wit h a detailed synopsis of market risk. (Jorion 2009 x). . 2 Backgrounds For those companies and financial institutions that are vulnerable to risks, management of risk is a vital function. There has been a satisfying reform in the risk-management process, curiously in the last decade and VaR is regarded as one of the solutions that received wide publicity in business circles. As per Holton (2003), the main fundamentals of the VaR can be traced back to as early 1922 when the New York Stock Exchange prescribed capital norms for its members. Until 1952, research in VaR was not in progress. Two independent researchers namely Roy and Markowitz almost concurrently advanced but with different version of measuring the risks and the same were make in 1952. As per Holton (2003), the two authors mentioned above were engaged on establishing a way of choosing portfolios that would be facilitating to obtain the benefit for certain level of risk. Holton was of the view that it took close four d ecades until VaR measurement started to be broadly employed by companies and financial instructions. As per Fernandez (2003), the worst financial crisis that occurred in 1987 and the crisis that forced to find a solution by the Basel Committee that all banks should keep adequate cash reserves so that it can cover probable losses in their concern assortment over a 10 day marked and 99% of their time. With the help of VaR, the quantum of cash to be maintained will be decided. Due to scummy risk management process and poor supervision, a huge volume of money can be lost, which was well evidence from the past financial crisis. Thus, VaR has widely been acknowledged as a breakthrough process due to historical errors that crept into the risk -management process. (Holton 2002). As of today, the usage of VaR is being widely employed in financial institutions but there is only limited usage of VaR in non-financial firms. This can be explained that why companies do not employ VaR as they do not normally predict their profits and losses on daily footings that are not impacted by irritability in prices in the short-run. However, Mauro (1999) stresses that VaR can be employed even by non-financial firms (companies) that are not impacted by volatility in prices, especially in a short-time horizon. Thus, the chief advantage of VaR is that it is a yardstick that can be employed to almost every