Philips’ risk manager highlights VAR’s inadequacy

Speaking at FX Week’s congress last week,Kirkland said the Dutch electronics company does not use VAR methodology.

According to Kirkland, the reasons for Philips’ decision are manifold: history is not a good indicator of future events, too many estimates are required and results are more difficult to understand than simple sensitivity analysis. Philips adopted mark-to-market accounting at the start of 2000 and uses forwards and options to hedge its currency risk.

Another important limitation of VAR, highlighted by Kirkland, is the unrealistic assumption of normality. “How many times have you heard a guy on a trading floor say: ‘That was a three standard deviation move,’ only for him to say exactly the same thing again a few weeks later?” he added.