VaR Calculations, or Value-at-Risk Calculations, are quantitative methods used to estimate the maximum potential financial loss a crypto asset portfolio could experience over a specific time horizon, given a defined probability level. It quantifies market risk under normal market conditions.
Mechanism
Common methodologies include historical simulation, parametric approaches relying on statistical distributions, and Monte Carlo simulations. These involve analyzing past price data, asset volatilities, and correlations, or simulating future price paths to determine the loss threshold that will not be exceeded with a given confidence level.
Methodology
The strategic application provides a standardized measure for market risk assessment, informs capital allocation decisions, establishes risk limits for trading desks, and facilitates compliance with internal and external regulatory guidelines. VaR is a fundamental tool for risk management in institutional crypto investing and options trading.
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