Learning objectives: Explain the principles underlying VaR mapping, and describe the mapping process. Explain how the mapping process captures general and specific risks
Questions:
714.1. For its investment portfolio, Peter's rapidly growing financial services firm includes a measure of value at risk (VaR) that is reported to key stakeholders, however the method does not currently utilize VaR mapping. The Risk Committee has asked Peter to make a recommendation as to whether the firm should adopt a mapping approach to determine the VaR. The following are four recent, key developments in the portfolio:
Among these developments, which of the above would tend to SUPPORT the adoption of VaR mapping, or put another way, would help to justify VaR mapping?
a. None of these developments indicate that VaR mapping is a suitable solution
b. Only the issues implied by I. and III. can be addressed by VaR mapping
c. Only the issues implied by II. and IV. can be addressed by VaR mapping
d. Each (all) of these developments indicate that VaR mapping is a suitable solution
714.2. 4. A portfolio of corporate bonds that have maturities of 1, 5, 10, and 15 years. The bonds in the portfolio carry the following S&P credit ratings (with Moody's equivalents in parenthesis): AA (Moody's Aa); A (Moody's A); BBB (Moody's Baa); BB (Moody's Ba) and CCC (Moody's Caa). How many general risk factors is the portfolio exposed to? (this question is based on Jorion's question 11.4) (Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (New York: McGraw Hill, 2006))
a. Five: Corporate bond yields at short and long maturities; plus rating migrations at three different general credit ratings
b. Six: Corporate bond yields at short, medium and long maturities; plus rating migrations at three different general credit ratings
c. Nine: Corporate bond yields at four maturities; plus rating migrations at five different credit rates
d. Nine: Government bond yields at four maturities; plus credit spreads for five different credit rating
714.3. Which of the following is TRUE about VaR mapping?
a. The valuation (aka, pricing) of a portfolio should be able to use the same risk factors employed in the VaR mapping
b. If the current market value of a well-diversified portfolio is not fully allocated to general risk factors, the remainder is allocated to cash
c. In the case of derivatives, notional values should be mapped to risk factors because these are significantly more stable than market values
d. Mapping implies that the VaR approach will necessarily be analytical (e.g., delta-normal) because mapping is compatible with neither historical simulation nor Monte Carlo simulation
Answers here:
Questions:
714.1. For its investment portfolio, Peter's rapidly growing financial services firm includes a measure of value at risk (VaR) that is reported to key stakeholders, however the method does not currently utilize VaR mapping. The Risk Committee has asked Peter to make a recommendation as to whether the firm should adopt a mapping approach to determine the VaR. The following are four recent, key developments in the portfolio:
I. The equity component of the portfolio increasingly includes a greater number of recent initial public offerings (IPOs)
II. The portfolio contains equity derivatives and other exposures that contribute to a portfolio risk profile that will change dynamically over time
III. The size, complexity and granularity of the portfolio has significantly increased in terms of the the number positions, the pricing series tracked, and the number of pairwise correlations
IV. The global nature of the portfolio includes some stale prices, due to elapsed market closings in different time zones, that are artificially depressing some computed correlations below their true values
Among these developments, which of the above would tend to SUPPORT the adoption of VaR mapping, or put another way, would help to justify VaR mapping?
a. None of these developments indicate that VaR mapping is a suitable solution
b. Only the issues implied by I. and III. can be addressed by VaR mapping
c. Only the issues implied by II. and IV. can be addressed by VaR mapping
d. Each (all) of these developments indicate that VaR mapping is a suitable solution
714.2. 4. A portfolio of corporate bonds that have maturities of 1, 5, 10, and 15 years. The bonds in the portfolio carry the following S&P credit ratings (with Moody's equivalents in parenthesis): AA (Moody's Aa); A (Moody's A); BBB (Moody's Baa); BB (Moody's Ba) and CCC (Moody's Caa). How many general risk factors is the portfolio exposed to? (this question is based on Jorion's question 11.4) (Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition (New York: McGraw Hill, 2006))
a. Five: Corporate bond yields at short and long maturities; plus rating migrations at three different general credit ratings
b. Six: Corporate bond yields at short, medium and long maturities; plus rating migrations at three different general credit ratings
c. Nine: Corporate bond yields at four maturities; plus rating migrations at five different credit rates
d. Nine: Government bond yields at four maturities; plus credit spreads for five different credit rating
714.3. Which of the following is TRUE about VaR mapping?
a. The valuation (aka, pricing) of a portfolio should be able to use the same risk factors employed in the VaR mapping
b. If the current market value of a well-diversified portfolio is not fully allocated to general risk factors, the remainder is allocated to cash
c. In the case of derivatives, notional values should be mapped to risk factors because these are significantly more stable than market values
d. Mapping implies that the VaR approach will necessarily be analytical (e.g., delta-normal) because mapping is compatible with neither historical simulation nor Monte Carlo simulation
Answers here:
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