Summary of Value at Risk

The New Benchmark for Controlling Derivatives Risk

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Value at Risk book summary
Money managers who need to gauge the downside of sophisticated derivative investments must study this thorough and complex book; the rest of us can just peruse its intriguing sagas of financial disaster, take an aspirin and lie down.

Rating

6 Overall

6 Applicability

7 Innovation

4 Style

Recommendation

As demonstrated by the bankruptcies of Britain’s Barings Bank and Orange County, Calif., any organization that dabbles in derivatives investments needs sophisticated risk-assessment tools like "Value at Risk." The concept of VAR is simple - this single number shows just how much an institution’s investment portfolio stands to lose. But calculating VAR is anything but simple, as author Phillippe Jorion’s complex formulas and dense prose illustrate. Jorion does an admirable job of explaining exactly why Barings went broke, but his book is not for the uninitiated. Without skipping a beat, Jorion throws around impenetrable phrases like "generalized autoregressive heteroskedastic model." Nevertheless, getAbstract recommends this necessarily complex book to money managers who need to gauge the downside of sophisticated derivative investments; the rest of us can simply peruse its intriguing sagas of financial disaster, take an aspirin and lie down.

In this summary, you will learn

  • What derivatives are
  • What types of derivatives exist
  • How they have become important risk management tools
 

Summary

The derivatives-related bankruptcies of entities such as Orange County, California, and Barings Bank show just how volatile derivatives can be.

England’s Barings Bank collapsed in 1995 after a rogue trader lost $1.3 billion on derivatives. Orange County went bankrupt in 1995 after losing...
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About the Author

Philippe Jorion is a professor of finance at the University of California at Irvine. He has a Ph.D. from the University of Chicago. He is author of Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County.


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