Dear David,
I’ve have struggling with the following question from FRM practice and past exams. Appreciate your kind help on this!
13) On CVAR (FRM exam 2002, question 62)
Credit value-at-risk (CVaR) is the 95% 1-day VaR of all positions with a single counterparty. Potential peak exposure is the 95% maximum credit exposure over the life of the portfolio. Given these definitions, which of the following statements is true? The portfolio in this question can contain both long and short positions.
a. All portfolios with the same CVaR will have the same potential peak exposure.
b. The CVaR for a group of trades with a single counterparty will always be greater than the potential peak exposure for the same group of trades.
c. Adding a new position to the portfolio will always increase the CVaR and the potential peak exposure.
d. There is no necessary relationship between CVaR and potential peak exposure.
Answer provided: d. There is no necessary relationship between CVaR and potential peak exposure.CVaR refers to a short-term position measure of credit risk. Longer-term measures of risk can give drastically different risk measures depending upon tenor of positions and other factors. CVaR can be the same for different portfolios but potential peak exposure can be drastically different. CVaR must, by definition, be less than or equal to the potential peak exposure. Adding new positions may be diversifying and, therefore, credit risk decreasing. The correct answer is no necessary relationship.
My question: I don’t quite capture what the answer is saying about the relationship between CVAR and potential peak exposure. What is meant by potential peak exposure here? Can it refer to the final notional amount in exchange at the maturity of a currency swap? Shouldn’t CVAR equal to unexpected loss UL at certain confidence interval and therefore should considers not only exposure but also default probability and recovery rate? As a result, CVAR and exposure are two totally different things. Can you please enlighten me?
Thank you for your enlightenment and correction!
Cheers
Liming
10/11/09
I’ve have struggling with the following question from FRM practice and past exams. Appreciate your kind help on this!
13) On CVAR (FRM exam 2002, question 62)
Credit value-at-risk (CVaR) is the 95% 1-day VaR of all positions with a single counterparty. Potential peak exposure is the 95% maximum credit exposure over the life of the portfolio. Given these definitions, which of the following statements is true? The portfolio in this question can contain both long and short positions.
a. All portfolios with the same CVaR will have the same potential peak exposure.
b. The CVaR for a group of trades with a single counterparty will always be greater than the potential peak exposure for the same group of trades.
c. Adding a new position to the portfolio will always increase the CVaR and the potential peak exposure.
d. There is no necessary relationship between CVaR and potential peak exposure.
Answer provided: d. There is no necessary relationship between CVaR and potential peak exposure.CVaR refers to a short-term position measure of credit risk. Longer-term measures of risk can give drastically different risk measures depending upon tenor of positions and other factors. CVaR can be the same for different portfolios but potential peak exposure can be drastically different. CVaR must, by definition, be less than or equal to the potential peak exposure. Adding new positions may be diversifying and, therefore, credit risk decreasing. The correct answer is no necessary relationship.
My question: I don’t quite capture what the answer is saying about the relationship between CVAR and potential peak exposure. What is meant by potential peak exposure here? Can it refer to the final notional amount in exchange at the maturity of a currency swap? Shouldn’t CVAR equal to unexpected loss UL at certain confidence interval and therefore should considers not only exposure but also default probability and recovery rate? As a result, CVAR and exposure are two totally different things. Can you please enlighten me?
Thank you for your enlightenment and correction!
Cheers
Liming
10/11/09
