How Does the Concept of ‘Value at Risk’ (VaR) Relate to Margin Setting?

Value at Risk (VaR) is a statistical measure used to estimate the maximum expected loss over a set time period with a certain degree of confidence. Exchanges use VaR models to inform the setting of Initial and Maintenance Margin requirements.

By calculating the VaR of a portfolio of positions, the exchange can set a margin level that is statistically sufficient to cover most potential losses, thereby protecting the exchange and the insurance fund.