Value at risk in practice

What does value at risk represent, and how do firms and regulators make use of it?

VaR is the loss that will not be exceeded with a stated probability (say $99\%$) over a stated horizon (say 10 days). It summarises market risk in one currency figure, is computed by parametric (variance-covariance), historical or Monte Carlo methods, and is used to set trading limits, allocate capital and meet regulatory capital requirements. It ignores the size of losses beyond the threshold and relies on stable correlations.