P1.T4.200 Linear value at risk (VaR)

[Suzanne Evans]

Questions:

200.1. Sam observes a one-day 95% value at risk (VaR) then assumes i.i.d. normal (parametric) returns in order to scale the VaR over the following four sets of horizons and confidence levels. Which is inconsistent with the others?

a. 5-day 99.0% VaR = $16.1 million
b. 10-day 99.0% VaR = $17.9 million
c. 20-day 95.0% VaR = $17.9 million
d. 20-day 99.0% VaR = $25.3 million

200.2. Jane writes an out-of-the-money (OTM) call option with a one-year term and a strike price of $30.00 when the current trading price of the underlying, non-dividend-paying stock is $26.00. The volatility of the stock is 46.0% per annum and the risk-free rate is 4.0%. There are 250 trading days in the year. If Jane assumes stock returns are i.i.d. normal and short-term drift (mu) rounds to zero, which is nearest to the ten- (10-) day, 95.0% delta-normal value at risk (VaR) of the short call option position?

a. $0.33
b. $1.97
c. $3.68
d. $5.12

200.3. Joe has a long position in a 10-year zero coupon bond with a face value of $100 and a yield (YTM) of 8.0% with annual compounding. The daily yield volatility is 30 basis points and, for convenience, Joe assumes the daily yield is normally distributed. Joe is only interested in a linear (duration-based) value at risk (VaR). Which is nearest to the one-day 99.0% linear VaR of the bond position?

a. $1.40
b. $2.12
c. $3.00
d. $3.24

Answers:

• Here in forum

 

[David Harper CFA FRM]

I'm glad to announce that, with the above, we resume the daily practice question "discipline" by starting new Topic Overviews for Topic 4 and Topic 6 (alternating; Mon = T4, Tue = T6, Wed = T4, Thur = T6. Four days per week, 12 new questions per week).

 

[achieverbc]

As is written in the solution of 200.3...why have you divided (D*Var*P) by 2??

 

[Nicole Seaman]

@achieverbc,

We have added a link to the bottom of all of our practice questions that will bring you to a separate section of the forum for paid members, as the answers are available to paid members only. If you are a paid member, you can click on that link and it will give you detailed answers and an area where you can discuss the answers with other paid members.

Thank you,

Nicole