Implementing Enterprise Risk Management: Case Studies and Best Practices

CHAPTER 24 The Role of VaR in Enterprise Risk Management Calculating Value at Risk for Portfolios Held by the Vane Mallory Investment Bank

ALLISSA A. LEE

Assistant Professor of Finance, Georgia Southern University

BETTY J. SIMKINS

Williams Companies Chair of Business and Professor of Finance, Oklahoma State University

You have to risk going too far to discover just how far you can really go.

—Jim Rohn, adapted from T. S. Eliot

Vane Mallory is a large investment bank headquartered in New York. The firm is multifaceted, conducting normal investment banking activities such as underwriting and providing advising and brokerage services to its clients, but also trading on its own account through its trading desk.

You are a senior risk analyst at Vane Mallory investment bank. This is a new position for you and part of your responsibilities includes providing the value at risk (VaR) estimates to the chief risk officer (CRO) of the company, Christian Cross. You are responsible for reporting on two different portfolios:

1. A commodity portfolio that contains energy commodity assets.
2. An equity portfolio that contains stocks of firms based in the United States.

In your previous positions, you were not responsible for this calculation, and it is a relatively foreign concept to you. Accordingly, your boss, the chief risk officer, has given you a few days to acquaint yourself with the idea of VaR so you are prepared to calculate it accurately and efficiently. You did some research and talked ...