Value at risk methodologies: Developments, implementation and evaluation

Value at Risk (VaR) is a useful concept in risk disclosure, especially for financial institutions. In this paper, the origin and development as well as the regulatory requirement of VaR are discussed. Furthermore, a hypothetical foreign currency forward contract is used as an example to illustrate the implementation of VaR. Back testing is conducted to test the soundness of each VaR model. Analysis in this paper shows that historical simulation and Monte Carlo simulation approaches have more advantages than the delta-normal approach based on the fact that these two approaches capture the option involved por tfolio features and pass three back testing models which are used to test the soundness of the VaR models.