Value at Risk (VaR) Calculator
Calculate portfolio Value at Risk (VaR) instantly. Estimate maximum potential loss at any confidence level.
The total value of your position or portfolio.
Standard deviation of returns (e.g., daily volatility).
Higher confidence levels show larger potential losses.
"There is a 95% probability your portfolio will not lose more than $3,290.00 in 1 day."
Result Summary
What is Value at Risk (VaR)?
Value at Risk (VaR) is a statistical measure that estimates the maximum amount you could lose on an investment over a specific time period, given a certain confidence level. For example, a 95% VaR of $1,000 means there's a 95% probability you won't lose more than $1,000 in a single day under normal market conditions.
How to Use This Calculator
- Portfolio Value: Enter the total notional amount of your position or portfolio in USD (or your base currency).
- Asset Volatility: Input the standard deviation of returns for your asset or portfolio. This represents the risk or "swing" of the price.
- Time Horizon: Specify the number of days for the calculation. For daily risk, use 1.
- Confidence Level: Select your desired confidence. 95% is the industry standard. Higher confidence levels (e.g., 99%) will show larger potential losses as they account for more extreme scenarios.
When Should You Use VaR?
- Risk Assessment: Before entering a large position, use VaR to understand the potential downside in dollar terms.
- Stop Loss Placement: VaR can help inform where to set stop losses based on statistical probability rather than just technical levels.
- Portfolio Comparison: Compare the risk of different portfolios or assets to ensure you are not taking on excessive risk.
- Regulatory Compliance: Professional traders and funds often use VaR to meet risk reporting requirements.
Important Limitations
Risk Warning
- VaR assumes normal market conditions and may significantly underestimate losses during extreme market events ("black swans").
- Historical volatility used in calculations may not accurately predict future volatility.
- This calculator uses the parametric method, which assumes a normal distribution of returns. Real markets often have "fat tails" (more frequent extreme events).
- Always use VaR as one of multiple risk management tools, never in isolation.
Frequently Asked Questions
What does a 95% Confidence Level mean?
A 95% confidence level means that 95 out of 100 days, your losses should not exceed the calculated VaR amount. Conversely, it means there is a 5% chance that your losses COULD exceed this amount on any given day.
How do I find the volatility of my asset?
You can find historical volatility (often denoted as "HV" or "Std Dev") on most charting platforms. Alternatively, you can calculate the standard deviation of daily returns over a specific period (e.g., 20 or 50 days).
Why does VaR increase with time horizon?
Risk accumulates over time. The longer you hold an asset, the greater the potential for price variance. VaR scales with the square root of time (√T) because volatility scales with time.
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