Prudential 2002 Annual Report Download - page 86
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Please find page 86 of the 2002 Prudential annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.the correlations of those factors. We regularly test our VaR model by comparing actual adverse results to those
estimated by the VaR model with a 95% confidence level over a one-day time horizon. The VaR for our trading
activities expressed in terms of adverse changes to fair value at the 95% confidence level over a one-day time
horizon was $2 million at December 31, 2002 and $5 million at December 31, 2001. The average daily VaR for
our trading activities, expressed in terms of adverse changes to fair value with a 95% confidence level over a one-
day time horizon, was $4 million during 2002 and $6 million during 2001. The following table sets forth a
breakdown of this VaR by risk component as follows:
As of
December 31,
2002
Average
for
2002
As of
December 31,
2001
Average
for
2001
(in millions)
Interest rate risk ...................................................... $ 2 $ 4 $ 5 $5
Equity risk .......................................................... — — — 1
Total(1) ........................................................ $ 2 $ 4 $ 5 $6
(1) At December 31, 2002 and 2001, and during the years then ended, VaR from each of foreign currency exchange rate risk and commodity
risk in our trading activities was immaterial.
Limitations of VaR Models
Although VaR models represent a recognized tool for risk management, they have inherent limitations,
including reliance on historical data that may not be indicative of future market conditions or trading patterns.
Accordingly, you should not view VaR models as a predictor of future results. We may incur losses that could be
materially in excess of the amounts indicated by the models on a particular trading day or over a period of time,
and there have been instances when results have fallen outside the values generated by our VaR models. A VaR
model does not estimate the greatest possible loss. We use these models together with other risk management
tools, including stress testing. The results of these models and analysis thereof are subject to the judgment of our
risk management personnel.
Prudential Financial 2002 Annual Report 85