Value at Risk (VaR) Utilisation
Trading book VaR as a percentage of the approved VaR limit
What is Value at Risk (VaR) Utilisation?
Value at risk (VaR) utilisation is the percentage of an approved VaR limit that a financial firm is using. VaR estimates the most it could lose over a set period at a given confidence level.
It shows how close a trading or investment desk is to its approved risk limit, so managers can act before it is breached.
How this KPI is measured
- Function
- Legal, Risk & Compliance
- Sub-function
- Market Risk
- Industry
- Financial Services
- Type
- Leading
- Impact
- Risk
- Unit
- %
- Measurement frequency
- Daily
- Formula
- (Actual VaR / Approved VaR limit) × 100
How to calculate it
Divide actual VaR by the approved VaR limit, and multiply by 100.
For example, if actual VaR is 8,000,000 and the approved limit is 10,000,000, utilisation is 80%.
Understand the assumptions behind VaR, such as the time horizon and confidence level, and remember that it does not describe losses beyond that level, so it should be used with stress testing.
Where it is used
Monitoring risk limits
Track use of approved risk.
Early warning
Act before a breach.
Reporting to risk committees
Show exposure.
How to improve it
Tips and common mistakes
- VaR has limits. It does not show worst-case losses.
- Use with stress testing.
- Follow regulatory requirements on risk measurement.
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