The purpose of this thesis is to introduce VAR(Value at Risk) reporting system, which measures how much market risks are exposed through financial derivatives transactions. This study not only explains the theoretical background of VAR, but also evaluates the price of financial derivatives. Furthermore it computes the VAR by using a historical simulation model and a variance-covariance model.
VAR is one of useful methods to manage all kinds of market risks and it has a few benefits. First, it measures market risks in a single number so even the highest level of a company can use it easily. Secondly, it generalizes investment alternatives so investors can select the investment having a priority. Particularly the variance-covariance model measuring VAR is an objective measuring method, which uses fundamental statistics such as a correlation coefficient between risk factors so it does not overvalue market risks.
It is necessary to manage market risks within a controllable limit under the condition of an increasing demand of derivatives as our economy is expanded and should be opened. In conclusion, VAR could be considered as one of many useful methods measuring market risks.
