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In: Finance

Explain the differences between VAR & DEAR. With what risk management activity are they most closely associated with?


Explain the differences between VAR & DEAR. With what risk management activity are they most closely associated with?

Solutions

Expert Solution

VAR DEAR
VAR gives the idea of a cumulative DEAR over a period of time, i.e. it gives the measure of the loss of the value of an asset over a months (for eg) duration It gives the potential loss over a one-day unanticipated swing in interest rates, foreign exchange rate and market volatility.
It is a general measure of risk It is VAR at  95% confidence worst-case loss over the next 24 hours due to adverse price moves

The DEAR would give us an idea of the price fluctuations in a bond's interest over the next day. Whereas the VAR would give us the idea of the same over the next 10 day period.


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