CMA Final · Risk Management in Banking and Insurance · Market Risk Management
A bank's one-day 99% Value at Risk (VaR) for its trading portfolio is Rs 4 crore. Assuming returns are independent and normally distributed with zero mean, what is the approximate 10-day 99% VaR using the square-root-of-time rule?
The 10-day VaR is about Rs 12.65 crore. Under independent, normally distributed returns, VaR scales with the square root of the horizon, so Rs 4 crore multiplied by the square root of 10, about 3.162, gives Rs 12.65 crore. Multiplying by 10 would wrongly assume perfect linear scaling.
- ARs 40.00 crore
- BRs 12.65 croreCorrect
- CRs 8.00 crore
- DRs 6.32 crore
Explanation
10-day VaR = 1-day VaR x sqrt(10) = 4 x 3.1623 = Rs 12.65 crore. Rs 40 crore wrongly multiplies by 10 (scaling linearly). Rs 8 crore and Rs 6.32 crore do not correspond to the correct scaling.
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