# Calculating Value at Risk (VaR) – Detailed Course Description

### 1. Course Content

1. INTRODUCTION

2. VAR METHODS

a. Variance Covariance Approach
b. Historical Simulation Method
c. Monte Carlo Simulation
d. Quick Review
e. Implementing VaR

3. METHODOLOGY

a. Setting the Scene

• Sample Portfolio

b. Preliminary steps
c. VaR Approach Specific Steps

• Variance-Covariance (VCV) VaR
• Determining Historical Simulation daily VaR

d. Scaling of the daily VaR

4. CAVEATS, QUALIFICATIONS, LIMITATIONS AND ISSUES

5. CASE STUDY – RISK FOR THE OIL AND PETROCHEMICAL INDUSTRY

a. A Framework for Risk Management
b. Risk Policy
c. Good Data and a First Look at Models
d. Models and Tools
e. Metrics and Sensitivities
f. Limits and Control Process

• Operational (Exception or Management Action) Limits
• Capital Loss & Stop Loss Limits
• Inventory Age Limits
• Concentration Limits
• Transaction Limits
• Exposure and Sensitivity Limits
• Pre Settlement Risk (PSR) and Potential Future Exposure (PFE) Limits
• Hierarchy of Limits

g. Conclusion

### EXCEL Examples

Yes – Available for sale

The example calculates individual asset and portfolio daily and holding-period VaR under the Variance-Covariance Approach (Simple Moving Average (SMA) and Exponentially Weighted Moving Average (EWMA) approaches) as well as the Historical Simulation Approach.

### 2. Introduction

One of the most pertinent questions in risk management has been: How much do you stand to lose, over a certain period and with a certain probability? The most common answer to this question today is Value at Risk, a risk measure that expresses itself as one number. What is that number and what does it stands for? In order to interpret this number we first have to assume that:

• Everything assumed in the (VaR) calculations/process is true
• All approximations made are accurate
• The future follows the past and whatever risk you are analyzing only exists for the specified (certain) period

If you are reasonably comfortable with all of the above, then the one number to answer your question is Value at Risk: A worst case loss with limits on time period and probability.