This section outlines the process of calculation of the VaR Equivalent Volatility (VEV) which is used in the calculation of MRM for Category 2 PRIIPs.

This calculation embraces the concept of the Cornish-Fisher Expansion method which transforms the Value at Risk (VaR) calculation into a volatility risk measure.

Once calculated, this VaR Equivalent Volatility (VEV) number is then assigned to a market risk measure (MRM) category ranging from a scale of 1 to 7. For example, a VEV of 10% would place the security into an MRM Class of 3.

An MRM Class of 1 contains those securities with the lowest risk, while a class of 7 would indicate the highest risk category.

CALCULATED ANNUALISED VEVMRM CLASS
< 0.5%1
0.5% - 5.0%2
5% - 12%3
12% - 20%4
20% - 30%5
30% - 80%6
> 80%7

The section below takes you through the required steps from manipulating the history of observed returns to calculate the Value at Risk (VAR) and finally calculating the VaR Equivalent Volatility (VEV).