Why is Value at Risk important, explain reasons

Question

Why is Value at Risk important? Specified with reasons?

Answer 1

An option to using a parameterized model for the underlying is to simulate straight by historical data, bypassing the normal distribution assumption in total. VaR is a very helpful concept in practice for the given reasons:

• VaR is easily computed for individual instruments, whole portfolios, or at certain level right up to an entire fund or bank
• You can change the time horizon depending upon your trading style. If you hedge daily you may want a one-day horizon; when you buy and hold for several months, then a longer horizon would be more relevant
• This can be broken down in components, therefore you can examine various classes of risk or you can look at the marginal risk of adding latest positions to your book
• This can be used to constrain positions of individual traders or whole hedge funds
• This is easily understood, from management, from investors, from people who are perhaps not which technically sophisticated