Value-at-Risk (VaR), henceforth referred to as VaR, is increasingly gaining acceptance as a popular measure of risk. The recent Basel-II consultative document and its emphasis on VaR-based models is an important case in point. VaR is an attempt to provide a single number summarizing the total risk in a portfolio of financial assets. VaR aims to make a statement of the following form: "We are X% certain we will not lose more than V dollars in the next N days." It can be more formally defined as a particular quantile of a portfolio loss distribution for a given time period.

In this paper we consider a portfolio of equities, equity futures and equity European options. The model comes out with optimal allocation of a unit capital between the portfolio elements. The objective is to minimize VaR of the portfolio. The problem can be considered as a general case of hedge ratio calculation, in which case we will have only a two-element portfolio containing equity and the equity future or equity and the equity option.

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