1. The advantages of the VaR model are as follows: 1. The VaR model measures risk concisely and clearly, unifies the risk measurement standards, and is easier for managers and investors to understand.

Risk measurement is based on probability theory and mathematical statistics, which is both highly scientific and simple in operation.

At the same time, VaR has changed the lack of unified measurement of risk in different financial markets, so that different terms (such as basis point present value, existing positions, etc.) have unified comparison standards, so that people in different industries have the same understanding when discussing their market risks.

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In addition, with unified standards, financial institutions can regularly calculate and publish VaR values, which enhances market transparency, helps improve investors' understanding of the market, enhances investors' investment confidence, and stabilizes the financial market.

2. It can be calculated in advance to reduce market risks.

Unlike previous risk management methods that measure risk after the fact, it can not only calculate the risk of a single financial instrument, but also calculate the risk of an investment portfolio composed of multiple financial instruments.

Comprehensive consideration of risk and return factors, choosing the combination that can bring the greatest return for the same risk will have higher operating performance.

3. Determine necessary capital and provide regulatory basis.

VaR establishes a scientific basis for determining the necessary amount of capital to resist market risks, enables financial institutions to base their capital arrangements on an accurate value-at-risk basis, and also provides a scientific, unified and fair standard for financial regulatory agencies to monitor banks' capital adequacy ratios.

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VaR is suitable for comprehensively measuring various market risks including interest rate risk, exchange rate risk, stock risk, commodity price risk and derivative financial instrument risk.

Therefore, this allows financial institutions to use a specific indicator value (VaR) to comprehensively reflect the risk status of the entire financial institution or investment portfolio, which greatly facilitates the exchange of relevant risk information among the business departments of financial institutions, and also facilitates the organization.

The top management is aware of the overall risk status of the institution at any time, which is very conducive to the unified management of risks by financial institutions.

At the same time, regulatory authorities are also able to put forward unified requirements for the market risk capital adequacy ratio of the financial institution.

2. The application of VaR is mainly reflected in: 1. Used for risk control.

At present, more than 1,000 banks, insurance companies, investment funds, pension funds and non-financial companies have adopted the VaR method as a means of risk management for financial derivatives.

Using the VaR method for risk control allows each trader or trading unit to know exactly how risky financial transactions they are conducting, and VaR limits can be set for each trader or trading unit to prevent excessive speculation.

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If strict VaR management is implemented, major losses in some financial transactions may be completely avoided.

2. Used for performance evaluation.

In financial investment, high returns are always accompanied by high risks, and traders may not hesitate to take huge risks to chase huge profits.

For the sake of sound operations, companies must limit possible excessive speculation by traders.

Therefore, it is necessary to introduce performance evaluation indicators that consider risk factors.

3. Estimate risk-based capital.

VaR is used to estimate the appropriate amount of capital required by investors when facing market risks. Risk capital requirements are the basic requirements of BIS for financial supervision.

The figure below illustrates the relationship between adequate risk capital and VaR value, where VaR value is regarded as the maximum acceptable (bearable) amount of loss faced by investors, which must be paid with own capital if it occurs.

Prevent the company from being unable to pay.

Warm reminder: The above content is for reference only.

Response time: 2021-02-02. For the latest business changes, please refer to the official website of Ping An Bank.