the value-at-risk (VaR) of a portfolio is the worst loss expected to be suffered over a given period of time with a given probability. The time period is known as the holding period, and the probability is known as the confidence interval. VaR is not an estimate of the worst possible loss, but the largest likely loss. For example, a firm might estimate its VaR over 10 days to be $100 million, with a confidence interval of 95%. This would mean there is a one-in-20 (5%) chance of a loss larger than $100 million in the next 10 days. In order to calculate VaR, a firm must model both the way the relevant market factors will change over the holding period and the way, if any, these changes are correlated between market factors. It must then evaluate the potential effects of these changes on its portfolio at the desired level of consolidation (by asset class, group or business line, for example). see also credit value-at-risk

   a standard transaction that is not tailored to the needs of either party. A plain-vanilla option pays out the difference between the strike price of the option and the spot price of the underlying at the time of exercise. see also exotic option, option

    see value-at-risk

   a measure of volatility, risk, or statistical dispersion. It is the square of the standard deviation.

   linear value-at-risk.

   the margin on a derivatives contract whose value varies in line with levels of volatility in the market. The higher the fluctuations in daily prices, the higher the variation margin.

   option risk parameter that measures the sensitivity of the option price to changes in the price volatility of the underlying instrument.

    see divestiture

   an option strategy relying on the difference in premium between two options that share a common underlying and maturity but are struck at different prices. see also call spread, put spread

   an acronym for Verband der Industriellen Energie- und Kraftwirtschaft e.V., the German association of industrial energy users and self-generators. This association represents the interests of industrial energy users in Germany for whom energy is a major cost component, with current members accounting for the majority of industrial energy consumption. www.vik.de

   a measurement of a liquid’s resistance to flow. As temperature increases, viscosity decreases.

   An acronym for very large crude carrier; the super-tankers used for transporting crude oil that are capable of carrying more than 200,000 metric tons.

   a measure of the variability of a market factor, most often the price of the underlying instrument. Volatility is defined mathematically as the annualised standard deviation of the natural log of the ratio of two successive prices. The actual volatility realised over a period of time (the historical volatility) can be calculated from recorded data. Volatility is one of the variables that must be specified in the Black-Scholes model of option pricing: a vanilla option will cost more when volatility is high than when it is low. However, volatility is the only one of these variables whose value must be estimated. The estimate used (known as the implied volatility) can be derived from the prices of options in the market and the known input variables. However, the Black-Scholes model also assumes that volatility is constant, which is not true. New techniques have been developed to cope with volatility’s variability, including mean-reverting models (such as Garch) and stochastic volatility models.

   the difference in implied volatility between out-of-the-money puts and calls. The origins of the volatility skew are not always clear, but factors may include reluctance to write calls rather than puts, sentiment about market direction, and supply and demand. see also implied volatility

   if the implied volatility of an option is plotted against its strike on a graph, the chart is typically shaped like a smile (less often a frown). This curve is known as the volatility smile. It may reflect the fact that out-of-the-money events are more common than geometric Brownian motion would predict. This leads to extra value for out-of-the money options. see also implied volatility

   the term structure of volatility is the curve depicting the differing implied volatilities of options with differing maturities. The term structure is curved, because the volatility implied by short-dated option prices changes faster than that implied by longer-term options, but other effects, such as mean reversion, may also play a part. see also implied volatility

   trading, usually through the options markets, based on the belief that implied volatility will not match the volatility actually realised over a given period, or that the difference in implied volatility between different options will alter over a given period. Options are used because of their sensitivity to volatility.

   the effect of fluctuations in demand for a product or service on revenue.

    see Verbandevereinbarung