Thread: Value-at-Risk Definition View Single Post
#2
01-20-2020, 08:37 PM
 PaulP Member SOA Join Date: Jul 2013 Studying for ERM, CFE, SDM Posts: 1,388

Good, GOOD question!

There are actually two measures of VaR - relative, and absolute.

For example, let's say we expect to profit \$100, but the 95th percentile is a loss of \$200.
The absolute VaR is \$200 - that is, the actually dollars lost.
The relative VaR is \$300 - this is the difference between what we thought we'd get and the loss.
So, for your answer, it could be either a measure of company value OR losses! It is hard to say what is more typical. They both have their uses. The textbook often gets around this confusion by assuming a mean profit/loss of \$0, so then relative VaR and asbolute VaR become the same.

Traditionally, the SOA has been fairly forgiving on which one we can use (unless they specify). So, if it is on the exam, and they just ask for "VaR," you can pick either one.

The only exception to the above rule is if we are talking about capital. When we talk about capital, we are required to use relative VaR, because we want to know how much in excess of our reserve we need to hold. So if we expect a loss of \$500 at the worst, and we have \$200 of reserves for our expected loss, then we only \$300 of capital.
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