The value at risk concept has taken the risk management world by storm. As practitioners and regulators worldwide embrace it as a bona fide risk measurement tool, however, its greatest asset, the ability to summarize disparate concepts of risk throughout an organization into one uniform number, gives rise to potential inadequacies which, if not understood and accounted for, may lead to serious risk measurement oversights.

A simple definition of value at risk is the maximum expected "worst case" loss for a given confidence level over a defined period of time. A typical application of the concept would be for a risk manager to report there is a 1% probability that more than X dollars will be lost over a 10- day period, given the current balance sheet composition.

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