• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Risk Budgeting and VAR

  • Thread starter Batsirai Kapembeza
  • Start date
B

Batsirai Kapembeza

Member
Hello everyone,

May someone kindly please explain the 3rd step of the Risk Budgeting process found in the core reading;

-Performing VaR calculations to determine the total risk budget.

How does one actually go about using VAR to determine the total risk budget and in what metric will the risk budget be? I'm a bit confused as to how the calculations in VAR can help with actually determining the Risk Budget.I'm failing to see the link. Thanks.
 
Hi, The risk budgeting process would be complex in reality, rather than the simple steps that are in the course notes, and every consultancy would have their own process. The key for step 2 is to get an idea of the total amount of risk that the client is able and willing to accept. This may be done by running various portfolios through the ALM, and working out the VaR, then assessing whether the client is happy to accept that VaR risk. So if you ask the client "are you happy with this sort of portfolio where there is a 1% chance over the coming 5 years that your fund will be underfunded to the tune of £3m?" and the client says "no", then you have used VaR to establish a level of total risk that is too high. The process would continue until the client is happy with a level of risk of loss that is presented by the model. the third step then begins, which is allocating that between the various types of risk.
 
Thank you very much. It makes some sense to me now.
 
You must log in or register to reply here.
Back
Top