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FRM Part II · FRM Exam Part II · VaR Mapping

A bank maps its equity options book to the underlying stocks using delta-normal mapping and measures VaR only from the underlying price movements. Which risk factor exposure is entirely missing from this VaR measure?

Implied volatility exposure, or vega, is missing. Delta-normal mapping represents options only through linear positions in the underlying price, so changes in implied volatility, which affect option values independently of the stock price, are not captured unless volatility is added as its own risk factor.

  1. AExposure to changes in the underlying stock price
  2. BExposure to the first-order linear movement of the underlying
  3. CExposure to changes in implied volatilityCorrect
  4. DExposure to the correlation between stocks in the same portfolio

Explanation

Delta mapping captures only first-order sensitivity to the underlying price. Option values also depend on implied volatility (vega), which is not a stock price factor. It is omitted unless volatility is added as a separate risk factor. Stock price and correlation effects are captured through the underlying mapping.

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