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Financial Risk (Masters Level) - Coursework Example

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It is the key ingredient for profit generation within whatever market sensitive activity. An investor’s viewpoint of risk is it is all about losing money. VaR is founded on the same common since fact. Through the assumption that venture…
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Financial Risk (Masters Level)
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Download file to see previous pages It indicates the highest possible loss amount, which some portfolio will likely lose within a given time period at specified confidence level. A good example would be 95% daily VaR for $1 Million, could mean the likely hood for the same portfolio to lose over a million dollars within a worst day happens to be below 5%. In no way does this mean that such portfolio may not lose over a million dollars. The truth is that over one hundred days, the portfolio would be expected to lose over $1 million for five time approximately. In addition, this does not mean that an individual would not collectively loose significantly more along a longer horizon.
Banks, mutual funds, hedge funds as well as other financial service companies or even brokers can utilize value at Risk. Most of such firms use VaR in prediction of size of outlying losses of the future, or even gains that their portfolios or those of their clients might experience (Ran & Jin, 2008: p 1). Most firms make use of VaR in the determination of needed collateral from an execution customer for some margin loan utilized in trading financial instruments, for instance. Buy-side entities like hedge funds make use of VaR in determining whether the allocation of a portfolio does exceed investment mandate or a current risk tolerance (BPL, 2015, 2).
Despite the fact that VaR was not used broadly before mid-1990s, the measure’s origin date further back in time. Markowitz Harry and others developed the mathematics, which underlie VaR in portfolio theory context (Glyn, 200:p 32). However, their efforts aimed at a different destination (devising equity investors’ optimal portfolios). Specifically market risk focus as well as the co-movements effects in such risks are core to the manner in which VaR is computed (Ronald, Kees, & Rachel, 1999: P 2).
The Motivation for VaR measures utilization, though, arose from the crises, which affected financial service firma through time as well as supervisory responses to such ...Download file to see next pagesRead More
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