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.