Value-at-Risk (VaR) Calculator
Value-at-Risk (VaR) FAQ
What does Value-at-Risk mean?
Value-at-Risk (VaR) is the maximum expected loss of a portfolio at a given confidence level over a certain time horizon.
What is a good confidence level?
Most traders and institutions use 95% or 99% confidence levels depending on their risk tolerance.
Can VaR predict future losses?
No. VaR only estimates the maximum expected loss under normal market conditions. It does not predict black swan events.
Is VaR useful in crypto?
Yes, especially because of crypto’s high volatility. VaR helps quantify downside risk in portfolios.
What are the limitations of VaR?
VaR assumes normal distribution of returns and does not capture tail risks or extreme events.
What’s the difference between VaR and CVaR?
Conditional VaR (CVaR) goes beyond VaR and measures the average loss beyond the VaR threshold, giving better insight into tail risks.
What is Value-at-Risk (VaR)?
Value-at-Risk (VaR) is a widely used risk management metric that estimates the maximum potential loss of a portfolio over a defined period of time at a specified confidence level. In simple terms, it answers the question: “How much could I lose with X% confidence over the next Y days?”
For example, a 1-day 95% VaR of $500 means that there is a 95% chance the portfolio will not lose more than $500 in a single day. Conversely, there is a 5% chance that losses could exceed this amount.
The formula for parametric (variance-covariance) VaR is:
VaR = (Z-score × σ × √t) × Portfolio Value
Where: - Z-score depends on the chosen confidence level (1.65 for 95%, 2.33 for 99%).
- σ is the standard deviation (volatility of returns).
- t is the time horizon in days.
VaR is commonly used by banks, hedge funds, and risk managers to measure and limit potential losses. In crypto, where volatility is much higher than traditional markets, VaR can help traders understand and quantify downside risk in portfolios.
However, VaR has limitations: it assumes returns are normally distributed, which is not always the case in crypto markets prone to extreme price swings. It also does not predict the size of losses beyond the confidence level (tail risk). Still, VaR remains one of the most practical tools for evaluating portfolio risk exposure.