Defining Value-at-Risk

An experienced finance professional based in New Jersey, Rao Chalasani most recently served as chief technology officer and director of trading risk management for Bank of America-Merrill Lynch in New York, NY. At Bank of America (BofA), Rao Chalasani developed a new risk management system that incorporated calculation of value-at-risk.

By definition, value-at-risk, or VaR, calculates the maximum loss under a determined probability in a specified time frame. The calculation of VaR requires the pre-selection of a probability percentage, a specified period of time, and a currency. Together, these three elements make up the value-at-risk metric.

As an example, an investment firm calculates the VaR on an asset at $100 million with a one-week, 95 percent confidence level. Under this metric, the investment firm may determine that an asset’s value is only 5 percent likely to drop more than $100 million over the course of one week. This determination can help an investor or manager compare the potential impact of an asset on a trading portfolio.

An analysis of available reserves and capital can determine the effect of the potential loss and help an institution determine whether an event would have a severe impact on capital. The technique can also be helpful in determining the risk to a complete portfolio or a firm as a whole.

The Role of CTOs

Rao Chalasani has built his career on a foundation of technology and development risk management strategies. A resident of New Jersey, he has worked at mega corporations in New York, NY, such as Bank of America (BofA), JPMorgan Chase, and Merrill Lynch. At Merrill Lynch, Rao Chalasani served as risk management strategist and chief technology officer (CTO).

On the surface, the role of a CTO seems simple: choose and implement technologies that facilitate success for a company. Below the surface, however, the specifics run a gamut of responsibilities. A CTO may be able to choose a third-party solution for the company, such as a database program to keep track of customer accounts and inventory. When such solutions do not exist, or when existing solutions do not provide the functionality the company needs, CTOs must lead the research and development (R&D) of a proprietary solution. In either case, CTOs need to adhere to standards and regulations.

CTOs must also be aware of tech trends and news that could affect the company’s bottom line. Toward that end, CTOs must monitor and evaluate emerging technology in order to determine if it should be brought into the fold, or passed over in favor of other products. CTOs communicate their decisions to their managers, as well as to partners, investors, and employees.

Types of Risk Management Strategies

Specializing in business and technology, New Jersey resident Rao Chalasani worked at Bank of America (BofA) in New York, NY, in the capacities of director of trading in risk management and business, and chief technology officer (CTO). At BofA, Rao Chalasani’s responsibilities comprised developing and implementing a company-wide risk management platform.

Risk management is a wheel with many spokes. Depending on a company’s goals and needs, risk management experts may invoke strategies such as risk acceptance, risk avoidance, and risk transference. Risk acceptance does not involve any mitigation; companies choose this option when they do not want, or do not have, resources to spend on implementing other strategies. They accept the risks and forge ahead, hoping that achieving success proves worthwhile.

Risk avoidance lies at the opposite end of the spectrum. Rather than brace for impact, companies spend resources on any and all actions that can mitigate risks. As a result, risk avoidance is usually the most expensive risk management strategy.

Falling somewhere in between risk acceptance and risk avoidance, risk transference involves the responsibility and ramifications of a given risk being handed to a willing third party. Examples include outsourcing operations such as customer service to other businesses, rather than handling it in-house. Risk transference works best for companies willing to admit that a particular operation is not its forte, and should be handled by more knowledgeable parties.