Understanding VaR and CVaR Calculations

VaR and CVaR

Advanced risk measurement tools.

Value at Risk (VaR)

Definition: Maximum expected loss at a given confidence level over a specific time period.

Example: "95% VaR of $5,000" means there's a 5% chance of losing more than $5,000.

Conditional VaR (CVaR)

Definition: Expected loss when losses exceed VaR. Also called Expected Shortfall.

Example: "CVaR of $8,000" means if losses exceed VaR, expect average loss of $8,000.

Calculation Methods

1. 1. Historical: Uses past data
2. 2. Parametric: Assumes normal distribution
3. 3. Monte Carlo: Simulates scenarios

Our Approach

We use all three methods and present:

• Conservative estimate
• Expected case
• Worst case

Using VaR/CVaR

• Set position sizes
• Determine risk budget
• Compare investments
• Regulatory compliance