Calculating VaR: A Review of Methods

Many firms now use Value-at-Risk (“VaR”) for risk reporting. Banks need VaR to report regulatory capital usage under the Market Risk Rule, as outlined in the Fed and OCC regulations [1] and [2]. Additionally, hedge funds now use VaR to report a unified risk measure across multiple asset classes. There are multiple approaches to VaR, so which method should we choose? In this brief paper, we outline a case for full revaluation VaR in contrast to a simulated VaR using a “delta-gamma” approach to value assets.