What Is Value At Risk (VaR) Margin?
A television screen displays a news report about the coronavirus outbreak as a trader monitors financial data on computer screens on a trading floor. (Photographer: Chris J. Ratcliffe/Bloomberg)

What Is Value At Risk (VaR) Margin?

This is a series of explainers to educate and inform new investors. In association with Dun & Bradstreet India as knowledge partner.

Value at Risk (VaR) Margin: Definition, Meaning & Basics

Value at Risk margin is a measure of risk. It is used to estimate the probability of loss of value of a share or a portfolio, based on the statistical analysis of historical price trends and volatilities. Based on VaR margin, stock exchanges calculate risk of loss in the value of a stock, typically with a one-day time horizon.

To arrive at VaR Margin, three important parameters are considered:

  1. Confidence level
  2. Time horizon
  3. Estimate of loss

A stock with a 10% VaR margin requirement means that there may be a potential loss of 10% in the value of the stock in one day with a given level of confidence—say 99%.

VaR margin is published by the exchanges multiple times during the day, based on the movement in price of a stock. VaR margin is used to apply haircut on stocks by many entities such as banks, which provide loans against shares.

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