How Is 'Value at Risk' (VaR) Used in Calculating Margin Requirements? ▴ Learn

How Is ‘Value at Risk’ (VaR) Used in Calculating Margin Requirements?

Value at Risk (VaR) is a statistical measure used by CCPs and prime brokers to estimate the maximum potential loss a portfolio could incur over a specified time horizon (e.g. one day) at a given confidence level (e.g. 99%).

The calculated VaR is then used as the basis for the initial margin requirement. The initial margin is set to be at least equal to the VaR, ensuring that the collateral covers the expected worst-case loss scenario.

What Is the Primary Purpose of a Value at Risk (VaR) Model for an OTC Desk?

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What Is the Formula for Calculating Initial Margin under a Standard Portfolio Margining Model?

Does the Maximum Loss Change If the Underlying Asset Is Purchased at a Different Price?