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Strategies & Market Trends : The Rational Analyst

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To: Skipperr who wrote (15)	12/16/1997 9:10:00 AM
From: Bucky Katt	Read Replies (1) of 1720

Well, it can, to a point. The real unknown is the human emotion factor. VAR is a measure to improve control of financial risks which is called "value at risk". What it hopes to do is summarize the worst expected loss over a target horizon within a given confidence interval. Again, it only works to a point, because you cannot factor the human emotion because it is not logical. So, you have to also bring in fundamentals to your planning. Something that helped bring about the Korea meltdown is no one seems to have factored in currency risk when borrowing in denominations other than the Korean won. Thus, a 10 billion debt, in dollars, after the 40% won meltdown now becomes a 14 billion dollar debt. They did not bother to hedge the currency risk. I can't imagine how they could have managed this, but they did! (They just went to a floating currency, so this will help them, in the short term.)

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