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FRM Part II · FRM Exam Part II · VaR Mapping

A bank wants to compute VaR for a newly issued 7-year bond with no meaningful trading history. Which feature of VaR mapping most directly addresses this problem?

Mapping the new bond's cash flows onto benchmark vertices with reliable data solves the problem. The bond's risk is then derived from established risk factors rather than its own short price history. Using the thin history, changing confidence level, or assuming zero correlation would distort the VaR estimate.

  1. AMapping the bond's cash flows onto vertices for which reliable risk factor data existCorrect
  2. BUsing the bond's own 1-day price changes since issuance to estimate volatility
  3. CApplying a lower confidence level to compensate for the short history
  4. DAssuming the bond's return is perfectly uncorrelated with all other positions

Explanation

Mapping lets the bond's risk be expressed through standard risk factors, such as zero-coupon rates at benchmark vertices, which have long data histories. Using its own short history gives unreliable estimates. Lowering the confidence level or assuming zero correlation misstates risk and does not solve the data gap.

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