Banking Terms - Set 21 (VAR, Business Risk)

Value-at-risk (VAR)

A value-at-risk (VAR) model is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities. A loss which exceeds the VaR threshold is termed a "VaR break".

For example, if a portfolio of stocks has a one-day 5% VaR, there is a 0.05 probability that the portfolio will fall in value.

Business Risk

The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet the company’s operating expenses.

E.g. Manufacturer of a particular product, the consumption of which is declining because of adverse economic conditions will be finding it difficult to look at the expenses of the industry for further production/development.