Value at risk model in risk management and an application in the financial market through historical simulation method

The risk element is closely related with uncertainty and probability. Risk exists whenever If uncertainty and high probability exist. Today risk management is a crucial task for the companies.In risk management, it is not always possible to reduce the risks to zero but they could be limited. First step for financial risk managament is to define risk, second step is to assess risk and the final step is to control risk.Value at Risk Method (also called VaR) is one of the ways to assess risk that risk management uses. There are three calculation models for this method: variance-covariance (also called VCV), Monte Carlo simulation and historical simulation.This thesis aims to assess value at risk of IMKB100 index portfolio, gold portfolio, Dollar and Euro portfolio using the historical simulation method. Imaginary portfolios are used the carry out the analysis. The value of each portfolio is 1 million new Turkish Liras. The basic hypothesis is that the value at risk of the gold portfolio is higher than the other portfolios. This assumption is based on the high yield of the gold in the last year.The analysis show that the gold portfolio has 30 %, the Euro portfolio has 13 % return, IMKB 100 index has 9 %, the Dollar portfolio has 4 % loss in a year. The value at risk of the portfolios at 95 % confidence level are as the following: The IMKB 100 index: 32.176 YTL, the gold portfolio: 17.434 YTL, the Dollar portfolio: 14.937 YTL, and the Euro portfolio: 14.465 YTL. The value at risk of the portfolios at 99 % confidence level are as the following: the IMKB 100 index: 55.025 YTL, the gold portfolio: 36.900 YTL, the Dollar portfolio: 20.628 YTL and the Euro portfolio: 19.972 YTL.The findings lead to the rejection of the hypothesis. The primary reason for result could be high volatility in financial markets in a year and effect of this volatility on IMKB. The other reason could be the significant increase in the exchange rate of Euro against the U.S. Dollar.