VAR Interpretation

CFA Level II
#1

I am trying to understand the concept of VAR and its interpretation.

It says that there are two interpretations:

5% VAR of $12,500 daily

  1. There is a 95% chance you will not lose more than $12,500

  2. There is a 5% chance you will lose at least $12,500

I find these two statements contradicting each other. Not sure how to interpret them.

Can someone help me?

#2

There is a 95% chance that I will make money or that losses will be between $0 and $12,500. The other 5% are my “Holy crap!!!” scenarios.

#3

the two sentences i wrote are still not clear with the explanation you gave me :frowning:

#4

Let’s say this is the graph of my profits. My “Holy crap!!!” scenarios are in the blue section (5%) while the grey part is what I expect to happen 95% of the time.