The ultimate aim of any modern corporate is growth with profit maximization. Growth is the first and foremost characteristic of nature and its products which include modern societies with all their industrial, agricultural and service sectors and above all the research organizations to cater to the needs of primary, secondary and tertiary sectors. Governed by the laws of the universe and nature, societies, markets and above all human life are in the constant churn of development in the realm of creativity and innovativeness.

Value at Risk (VaR) has become a favorite risk measurement tool among the banks and financial institutions all over the world. The banks are mainly using the VaR as risk metrics to describe the probability of the market risk of a trading portfolio. Not only banks, but securities firms, commodity dealers etc., are also using VaR. This article gives a meticulous discussion on the VaR as risk metrics and its application in risk measurement and control.

Suppose you are managing equity portfolio of a privately held mutual fund. You use various derivatives instruments like index futures, individual stock futures, and stock options for managing your portfolio and to take advantage of the market movements. Your board of directors has read about the losses suffered due to derivative tradings by various companies in the world, and is concerned about whether the same thing can happen to their fund. That is, they want to know how much market risk their funds face. You can explain them by describing the various positions taken in the fund, but this will not be very helpful unless there are very few stocks and positions taken. Even then, it helps only if the board of directors understands all the positions and instruments, and the risks inherent in each of them. Instead you can talk about the portfolio's sensitivities, i.e., how much the value of the portfolio changes when the various stock prices change, and perhaps option delta's and gamma's 1 . But these explanations will not give much comfort to your directors, since, you cannot just convince them that you may never speculate but rather use derivatives only to hedge the various market movements. The best answer that may give them comfort about the amount of market risk the fund is facing is perhaps the Value at Risk (VaR).

The modern age of risk measurement began in 1973. The year saw the collapse of Bretton Woods system of fixed exchange rates and the publications of the Black-Scholes option pricing formula. The collapse of Bretton Woods system and the rapid transition to a system of floating exchange rates among many of the major trading countries provided the right push for the measurement and management of foreign exchange risk, while the Black-Scholes formula provided the conceptual framework and basic tools for risk measurement.

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