The VaR of a portfolio is the worst loss expected to be suffered over a given period of time with a given probability. The time period is known as the holding period, and the probability is known as the confidence interval. VaR is not an estimate of the worst possible loss, but the largest likely loss. For example, a firm might estimate its VaR over 10 days to be $100 million, with a confidence interval of 95%. This would mean there is a one-in-20 (5%) chance of a loss larger than $100 million in the next 10 days.
In order to calculate VaR, a firm must model both the way the relevant market factors will change over the holding period and the way, if any, these changes are correlated between market factors. It must then evaluate the potential effects of these changes on its portfolio at the desired level of consolidation (by asset class, group or business line, for example).
* see credit value-at-risk
The Energy Risk Glossary, now in its eighth edition, provides an at-a-glance explanation of the myriad specialised terms and acronyms used in energy trading and risk management.
This year, the guide has been updated by Aviv Handler of ETR Advisory. Energy Risk would like to thank him for his input into this edition, which benefits greatly from his valuable experience and insight into energy markets.
The fast-changing nature of these markets means much has changed since our last edition – almost 200 new entries and revisions have been made this year. Reflecting the increasing importance of regulation, definitions of the Markets in Financial Instruments Directive (MiFid) and the Ljubljana-based Agency for the Cooperation of Energy Regulators (Acer) make it into the glossary for the first time. A focus on improving back-office infrastructure and mitigating counterparty risk is also apparent from the inclusion of terms such as ‘portfolio reconciliation’ and ‘portfolio compression’.
The glossary is extensively cross-referenced, making for easy and thorough searches. We hope you find it useful.
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