What is Value at Risk?

VaR – a most widely used term for Value at Risk is a measure that gives the maximum loss that is most likely to be incurred in an investment or a trading position for a specific period of time. In other words, it can be said that VaR is the maximum possible downside risk of an investment for a given holding period of that investment. The factors that are considered for calculating the VaR are, the value of the investment, time of holding, possible volatility for the given holding period taken in terms of annualised percentage and the lastly the confidence level, that is the probability of that maximum loss happening. There are different methods available to calculate the VaR. It is measured either as a percentage or directly in terms of actual money. If you are a commodity trader, then a VaR calculator is readily available on the Multi Commodity Exchange (MCX) website. It can be accessed on the following link: https://tinyurl.com/var2022

Here you can select the commodity and choose the number of days you want to hold, the confidence level and the volatility for a specific period of time. After giving these inputs, the calculator will gives us the VaR in terms of money. For example, holding one lot of gold futures contract for a period of two months with a 95 per cent confidence level has a VaR of ₹2,33,585.

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