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FRM Part I · FRM Exam Part I · Calculating and Applying VaR

A bank uses historical simulation with full revaluation to compute 1-day 99% VaR for an options portfolio using 500 daily scenarios. Which of the following correctly describes how the VaR is obtained?

Full revaluation historical simulation reprices the whole portfolio under each of the 500 scenarios, ranks the profit and loss results, and reads the loss at the 1% tail, about the fifth worst outcome. It does not rely on delta or gamma approximations.

  1. ARevalue the portfolio under each of the 500 scenarios, rank the resulting P&L, and take the loss at the 1% tail, roughly the 5th worst outcomeCorrect
  2. BCompute delta and gamma once and scale the portfolio volatility by 2.33
  3. CRevalue only under the single worst historical move and report that loss
  4. DAverage the 5 worst losses and report that as VaR

Explanation

Historical simulation with full revaluation reprices the portfolio at every scenario, orders the P&L outcomes and reads the 1% quantile; with 500 observations that is about the 5th worst loss. Option B describes a parametric method, C gives the maximum loss, and D describes expected shortfall.

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