An Introduction to Value-At-Risk, Fourth Edition

PREFACE TO THE FIRST EDITION

The concept of Value-at-Risk (VaR) has become a mainstay of financial markets risk management since its introduction by JP Morgan in 1994. An increasing number of banks and securities houses, and corporates, now use VaR as their main tool for providing management information on the size of their risk exposure. Initially VaR was used to measure the extent of market risk exposure; this was followed by the application of VaR methodology to the measurement of credit risk exposure.

As this is an introduction to the subject we have attempted to place VaR in context; hence the book begins by defining risk and describing the risk management function and other tools of risk measurement in the financial markets. VaR is best viewed as a tool within an overall risk management framework and hopefully the contents within will communicate this to the reader. An integrated risk management function within a bank or securities house will wish to incorporate VaR as part of its overall risk exposure and control framework. When such a framework is effective it serves an important purpose in providing comfort to a firm's shareholders that the management of trading, market and credit risk is no longer a significant cause for concern. At this point VaR as a risk measurement tool might be said to have come of age, and perhaps have assisted in the realisation of shareholder value. ...