ABSTRACT
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Appendix 2.A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
M ANAGERS LIMIT THE RISKINESS of their traders by imposing limits on the risk of theirportfolios. Lately, the Value-at-Risk (VaR) risk measure has become a tool used to accomplish this purpose. The increased popularity of this risk measure is due to the fact
that VaR is easily understood. It is the maximum loss of a portfolio over a given horizon,
at a given confidence level. The Basle Committee on Banking Supervision requires U.S.
banks to use VaR in determining the minimum capital required for their trading
portfolios.