CFA® glossary: V

14 terms beginning with V.

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Valuation allowance

A write-down of a deferred tax asset to what is expected to be used. Changes run through tax expense, so growing optimism arrives as earnings.

Value at risk

The minimum loss expected over a set period with a given probability: a 5% one-day figure of $1m means a loss at least that large one day in twenty. It says nothing about how bad the tail gets. Where it appears →

Value trap

A share that looks cheap on its multiples but is cheap for a good reason, such as a shrinking business, and stays cheap or gets cheaper. The characteristic risk of value investing.

Variable consideration

Contract price that depends on future events such as rebates, returns or bonuses. It is estimated and included only to the extent it is highly probable (US GAAP: probable) that no significant reversal will follow.

Variable interest entity

Under US GAAP, an entity whose control comes through contracts rather than voting shares, such as many special purpose entities. It is consolidated by its primary beneficiary.

Variance

The probability-weighted average of squared deviations from the mean, measuring dispersion. Its units are squared, which is why its square root, the standard deviation, is the figure usually quoted. Where it appears →

Variance inflation factor

A measure of multicollinearity for one independent variable: 1 ÷ (1 − R²), with R² from regressing it on the others. Above 5 warrants investigation, and above 10 signals a serious problem.

Variance notional

The amount a variance swap pays per point of variance: vega notional divided by twice the strike volatility, set so that a small move in volatility pays roughly the vega notional per point.

Variance swap

A swap paying the difference between realised variance and a strike variance fixed at the start, scaled by the variance notional. Because variance is volatility squared, the payoff is convex in volatility. Where it appears →

Variation margin

Funds deposited to bring a futures account back up to initial margin after losses take it below the maintenance level. It is how losses are settled in cash rather than left to accumulate.

Vega

The change in an option's value for a change in the volatility of the underlying. Positive for both calls and puts, because higher volatility raises the value of any option. Where it appears →

Verifier

The independent third party that carries out a GIPS verification of a whole firm, testing its composite construction and its policies for calculating and presenting performance. It does not certify any one composite's results. Where it appears →

Voluntary export restraint

A quota administered by the exporting country on its own shipments. The domestic price rises as under a quota, but the rent goes to foreign exporters, so the importing country loses more.

Vwap

Volume-weighted average price: the average price of all trades over a period, each weighted by its size. A common intraday benchmark, but a very large order moves it and so flatters its own execution. Where it appears →