Jorion.01.09.
Is VAR only applicable to derivatives risk?
VaR is absolutely NOT only applicable to derivatives. VaR has advantages over traditional metrics (e.g., notional limits) in treating derivatives because positions are replaced by a mapping to the fundamental risk factors. Jorion says, “in a sense, VaR extends current valuation methods for derivatives.”
VaR has disadvantages, but note that a key advantage of VaR is its ability to aggregate (“aggregation”): to aggregate the risk metric across the various assets (components) that constitute the portfolio. Please also note another type of aggregation (which may also be called economic capital): VaR’s ability to aggregate across major risk buckets (market, credit, and operational risk). This is its desirable property of serving as a common yardstick.