Value at Risk-IntroductionAs Walter Wriston, former president of Citigroup said, "All of life is risk management, not its elimination" and nowadays the system Modern banking is about risk control and returns. A financial institution's ability to control risk is a key factor determining its success or failure in the markets. As the latest financial crisis demonstrated, institutions that were not adequately prepared to deal with the crisis failed and were bailed out by governments or served as a bad example to economists. This is why risk management is an important field for every financial institution. Risk and Types of Financial Risk As Philippe Jorion (2007) mentions, one definition of risk can be the volatility of unexpected outcomes and can be created by natural disasters, such as the recent earthquake in Japan, which is believed to have caused a 3% decline of oil prices in the first few days following, or it may be caused by human activities, such as technological innovation, which could create unemployment. Phillip Best (1998) argues that risk matters only when it causes financial losses and financial risk is that linked to financial assets and portfolios and is classified into broader categories; market risk, credit risk, liquidity risk and operational risk. There is evidence that these types of risk can influence each other. Market risk is that linked to movements in the market price level. Credit risk arises when the parties involved in an economic contract are unable or reluctant to meet their commitments. Jorion (2007) classifies liquidity risk into two forms; asset liquidity risk and financing liquidity risk. Jorion (2007, p. 23): Asset liquidity risk… arises when a transaction may… mid-paper… have greater than expected effects. However VaR is always a statistical tool, meaning that if using VaR you estimate a loss of £10 million in a month, it is known that there may be months with smaller losses and months with losses greater than £10 million. There is also the problem of identifying the right method because each method has its strengths and weaknesses. So it is important for a risk manager to be able to identify key market drivers. These can be market rates and prices that can influence the portfolio and the need for this arises from the fact that without these factors it is impossible to build an adequate quantitative measure of market risk, due to the complexity of financial markets. So, to get started correctly you need to recognize the instruments through which the market risk factors will be embodied, such instruments can be options, swaps or loans..