07/14/97 TABLE: How to Figure How Much Is at Stake

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How to Figure How Much Is at Stake

VAR is a measure of how much a company's net worth could shrink if things suddenly go wrong. Here's one way a big bank might use it in the near future:
1. Assemble a bankwide portfolio of current positions in all accounts, including ones that hedge each other.
''We own gold futures, Japanese yen forward contracts, and New York State Thruway bonds.''
2. Calculate possible price swings by seeing how it would have performed on various days in the past.
''If I'd had this portfolio last Sept. 3, I would have made $1.5 million. On April 9, it would have lost $15 million.''
3. Plot the portfolio's percentage gain or loss for hundreds of such scenarios.
''This portfolio is a lot riskier than we thought.''
4. Figure the value at risk in each holding. Order traders that are overexposed to close out positions.
''Hey, commodity traders: You're too vulnerable to a big decline in gold prices. Bail out.''
5. Report your bank's value at risk for a certain period to the Federal Reserve.
''Dear Fed: We estimate that there is a 5% chance our portfolio will decline $20 million or more in the next two days.''

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