William G. Ferrell President, Ferrell Capital Management Greenwich, Conn. For the one-day horizon of bankers and dealers, Value-at-risk can be applied to all instruments. For the longer horizon of fund managers, simulation and downside risk enhance VAR to more accurately measure the risk in securities and derivatives with embedded options. These models represent only the first part of a thorough risk management function. We look at risk management as a combination of science and art, and we understand that there are events that can and will happen that are not embedded in anyone's model. Portfolio managers should consult with a pool of seasoned market professionals, either internal or external, to formulate reasoned judgments about a portfolio's risk to contain risk (defense) or to relocate capital to reflect changing risk (offense). Ferrell Capital has developed powerful tools, such as Heat Maps, to measure extreme market scenarios by shocking key drivers to risk. Demonstrating the aggregate portfolio's VAR under varying market scenarios provides a road map for shifting risk exposure. Additionally, we use Alpha VAR to monitor a portfolio manager's tracking risk, the excess risk between the benchmark and actual portfolio. The intent is not so much to predict the future in terms of where markets are headed. Rather, VAR is a scientific way to address what important changes in volatility and covariance of positions and markets will have on bottom line performance.
Tanya Azarchs Director, Standard & Poor's Financial Institutions Ratings New York Right now, there isn't enough uniformity in value-at-risk systems for anyone to get numbers they are comfortable with. Maybe the numbers are not comparable between institutions. There is model risk associated with VAR, and while they appear to have performed well in predicting the level of variation in daily earnings, you still cannot be confident that they could predict what would happen if there were another indicator that shocked the marketplace. It works from historical data, and it assumes that the future is going to be a lot like the past a most recent past. Strict VAR does that, but in addition, you will need scenario testing where you can input newer stress tests. Peter Gallant Treasurer, head of market risk policy,Citicorp, New York Value-at-risk is one of the tools to monitor risks, with its main purpose in the quantification of market risk in an effective market-related manner. On its own it would not be sufficient to monitor trading risk in derivatives or any other financial products.Peter Gallant Treasurer, head of market risk policy,Citicorp, New York Value-at-risk is one of the tools to monitor risks, with its main purpose in the quantification of market risk in an effective market-related manner. On its own it would not be sufficient to monitor trading risk in derivatives or any other financial products.