A unified VAR approach

Until just a few years ago risk management was a “desert shore, which never yet saw navigate its waters any that afterward had known return” (Dante). Today, the “shore”' is no longer so much of a desert. The first maps have been drawn and tools have been created that allow us to navigate without fear of losing our way. The sea of financial risks has been explored. Now, credit risk is all the fashion - a sea (or an ocean) that is almost all to explore. We need to create a channel that will link these two seas. This chapter, which may be seen as a sort of “navigation diary”, describes a possible approach for determining the value-at-risk (VAR) of a generic portfolio whose value changes depend on the variable conditions of financial markets. After reviewing some specific problems related to the calculation of VAR, three examples are presented: the first deals with interest rates, the second with stocks and the third with exchange rates. (A knowledge of general matters is taken for granted). In the section on interest rates, I present a VAR measure that is consistent with the perfect fit of the model. In the section on stocks, the VAR is determined relative to long and short positions on highly non-linear portfolios (hedges, vertical and calendar spreads, combinations); and finally, the section on exchange rates shows how VAR changes according to the reference currency. The more technical parts of the paper are contained in the Appendix and the two panels