Orange County Value-at-Risk Case
Posted: 26 Nov 1996
Date Written: 1996
SUBJECT AREAS: Financial risk management, fixed-income portfolio.
CASE SETTING: 1995, local government investment fund.
The purpose of this case is to explain how a municipality can lose $1.6 billion in financial markets and how this can be avoided in the future. The case also introduces the concept of "Value at Risk" (VAR), which is a simple method to express the risk of a portfolio. After the string of recent derivatives disasters, financial institutions, end- users, regulators, and central bankers are now turning to VAR as a method to control financial market risks. The case describes the portfolio composition, leverage, and risk exposure of the OC portfolio. It then introduces the various approaches to VAR and shows how VAR can be related to the concept of duration. The case illustrates how VAR could have been used to warn investors of the risks they were incurring. The case also discusses the recovery of Orange County and the impact of the bankruptcy on financial markets.
This is a stand-alone Web-based case. The case contains links to sites such as the Fed, Fannie Mae, and risk management sites. Students can also download a data file with historical yields, which allows them to compute the portfolio VAR based on a normal approximation or historical simulations.
JEL Classification: G11, H71
Suggested Citation: Suggested Citation