Banker's Glossary
Value at risk (VAR)
The amount or percentage of value that is at risk of being lost from a change in prevailing interest rates (similarly defined for things other than interest rates as well). The sensitivity of the value of a single financial instrument, a portfolio of financial instruments, or an entire entity’s balance sheet to changes in interest rates can be calculated. The resulting sensitivity is the amount of value at risk. See earnings at risk for an alternative measure of interest rate risk. VAR, sometimes called equity value at risk or EVAR, can be calculated by at least four different mathematical expresions. The simplest and least accurate measure of VAR is the difference between the calculated economic value of equity (EVE) under one projected rate scenario and the calculated EVE under a different projected rate scenario. See correlation VAR, empirical VAR and historical VAR for definitions of VAR calculated under more rigorous formulae.
Value based management (VBM)
A structured approach to measure the performance of a firm's unit managers or products in terms of the net benefit they provide to shareholders. Usually the application of shareholder value added (SVA) metrics. See shareholder value added.
Variable life insurance
A form of life insurance very similar to whole life insurance. In a variable life insurance policy, the cash value is invested in equity or debt securities. Policyholders can select and switch investment instruments. The policyholder bears the risk of the securities investment; the insurance company only guarantees a minimum death benefit amount.
Variable-rate mortgage
A less common name for an adjustable-rate mortgage (ARM).
Variance
Statistical term that quantifies the dispersion of data such as rates or prices around the mean. For example, highly volatile rates are rates that are sometimes high above the mean and sometimes way below the mean. Less volatile rates are dispersed closer to the mean and therefore have smaller variances. Similar to, but not the same as, the average amount by which data deviates from the mean for that data.
Variance swap
A swap agreement where one party agrees to receive implied volatility and pay realized while the counterparty agrees to receive realized volatility and pay implied.
Vector path
A series of prepayment speeds, in a sequence, that is chosen to reflect an assumed interest rate scenario. For example, if prevailing interest rates are near a cyclical low and still falling, a selected vector path might project a rate path that assumes steady or falling rates in the short run but rising rates for a year or more thereafter. A way of modeling future MBS performance with more complex assumptions than the customary single estimate of future prepayment speed.
Vega
The change in an option’s price resulting from changes in the volatility of the price for the underlying.
Vested accumulated benefit obligation
The portion of the accumulated benefit obligation under a defined benefit plan to which the employees have a legal right even if their employment is terminated before retirement.
Vintage CMO
A collateralized mortgage obligation (CMO) backed by seasoned mortgage securities.
VIX
A measure of implied volatility published by the CBOE.
Volatility
The rate of change in a variable. More formally, a statistical term to quantify the dispersion of variables such as rates or prices around the mean. A measure of the variability of the price of an underlying financial instrument, rate, commodity, or currency. Volatility only measures the quantity of the change - not the direction. Volatility is not influenced by the direction of the change; it does not matter whether the price rises or falls. Volatility is often used as a proxy for riskiness. See realized volatility and implied volatility.
VRM
See variable-rate mortgage.