The risk premium for a long position in an asset.
Appearance of the indicator.
Value at risk (VaR) is calculated by the formula:
$$ VaR =Return - RFR - BR $$
where $Return$ is the return on investment from a long position in the asset under consideration for the period, $RFR$ (risk free return) is the risk free rate, $BR$ (benchmark return) is the benchmark return.
<aside> 💡 By default, the risk free rate is the return of the strategy for arbitrage of benchmark funding rate payments, and the benchmark return is the return from holding a long position in BTC.
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The return on investment is calculated using the formula:
$$ Return =(price- \dfrac{\sum_{i=i}^{n}price_i}{n})×100% $$
Where $price$ is the price of the asset.
Investments have varying degrees of risk associated with them. For example, if an investor buys a stock, there is a risk that the stock price may fall, opening up the possibility that the investor will suffer a loss when the position is sold.
As a result, compensation for taking risk is required, and investments that carry more risk should offer an additional opportunity to make a profit.
However, U.S. Treasury bonds are generally considered risk-free returns if the bond is held to maturity. In other words, because U.S. Treasury bonds are backed by the U.S. government and have the highest AAA credit rating, their yields or interest rates are considered risk-free. As a result, Treasury bonds are typically used as a benchmark when calculating the risk-free rate that investors could earn if they invested in Treasury bonds.
In other words, the investment must at least earn a risk-free rate; otherwise, the risk is not justified.
In the classical view, the difference between the risk-free rate and the return on an asset is the risk premium or market risk premium.
The market risk premium is the difference between the projected return on a portfolio of investments and the risk-free rate. Since Treasury bonds are considered the risk-free rate, the market risk premium for a portfolio is the difference between the portfolio return and the selected Treasury bond yield.
There are different types of market risk premiums, depending on what the investor is trying to determine. A historical analysis might, for example, analyze the difference between the portfolio return over the past two years and the two-year Treasury bond yield over that period. When comparing historical market risk premiums, the process is fairly straightforward. However, past portfolio performance is not a predictor of future returns.