What is VAR?

Value at Risk, or VAR, is a measure of market risk. It expresses the maximum potential loss by an investor on the value of an asset or a portfolio of assets and liabilities, as a function of a ownership timeframe and confidence interval. It is based on a sample of historical data and is deduced from normal statistical laws.
For example, a portfolio worth €100m, with a VAR of -€2.5m at 95% (calculated on a monthly basis) has just a 5% chance to depreciate in value by more than €2.5m in one month.
VAR, which is used intensely by financial establishments as a management tool, is closely correlated to duration.
VAR is beginning to be used by major industrial groups, such as TeleDanmark, which publish it in their annual reports. It nonetheless has two drawbacks: