5.11 Value at risk

What is VaR?

In financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For example, if a portfolio of stocks has a one day 5 per cent VaR of Rs 10,000, there is a 5 per cent probability that the portfolio will fall in value by more than Rs 10,000 over a one day period, assuming the markets are normal and there is no trading. VaR is computed using exponentially weighted moving average (EWMA) methodology. VaR margin is a margin intended to cover the largest loss that can be encountered on 99 per cent of the days. For liquid securities, the margin covers one day losses whereas in the case of non-liquid securities, it covers three day losses so as to allow the clearing corporation to liquidate the position over three days.

The VaR calculations will be based either on BSE Sensex or S&P CNX Nifty and would be disseminated by the BSE and NSE daily on their websites by 6.30 pm. in a downloadable format. Other stock exchanges could make their own VaR calculations based on the BSE Sensex and S&P CNX Nifty or freely adopt the VaR calculations available on the sites of BSE and NSE. These would be used for the purpose of margin calculations for the transactions carried out the next day. The VaR-based margin would be capped at 100 per cent and collected on a T+1 basis. VaR magin is collected on an upfront basis by adjusting against the total liquid assets of the member at the time of trade.
As on Jan 22, 2010: 16.10 hours IST