4. Q: How do financial institutions price risk? Courtesy of A: Value at risk Mean of both distributions is zero Standard Deviation 100 million For both distributions: 84% VaR 100 million P(x<-100 million) = 0.158 95% VaR 200 million P(x<-200 million) = 0.046 P(x ≤ -100 billion) = ~0 P(x ≤ -636.13 million) = ~0.0000000001 P(x≤-100 billion) = 0.0005 P(x ≤ -636.13 million) = ~0.0005000001 Why is it important to find an alternative financial model
5. How can we use information theory? Some Definitions