What does credit VAR measure?

Credit Value at Risk (Credit VAR) measures the potential loss in value of a credit exposure over a specified period, given normal market conditions, at a certain confidence level. This calculation seeks to estimate the minimum loss that an investor might expect as a result of credit risk, or the risk of default by a counterparty.

Choosing minimum loss due to credit exposure over time aligns with the primary goal of Credit VAR, which is to quantify the worst expected loss in a portfolio of credit instruments over a defined timeframe. This information helps investors and risk managers understand the risks associated with their credit exposures and enables them to allocate capital accordingly or set limits on the level of risk they are willing to accept.

The other options do not accurately capture the essence of what Credit VAR entails. For instance, measuring the maximum credit an investor can have, assessing the overall credit rating of a company, or looking at historical loss rates across a portfolio lacks the specific focus on quantifying potential losses related to credit risk that Credit VAR provides.