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CMA Final · Risk Management in Banking and Insurance · Market Risk Management

A bank's portfolio has a one-day 99% VaR of Rs 4 crore. Using the square-root-of-time rule and assuming returns are independent and identically distributed, what is the 10-day 99% VaR (approximately, taking the square root of 10 as 3.16)?

The 10-day VaR is about Rs 12.64 crore. Under the square-root-of-time rule with independent, identically distributed returns, VaR scales with the square root of the horizon, so Rs 4 crore multiplied by 3.16 gives Rs 12.64 crore, not a linear multiple of ten.

  1. ARs 40.00 crore
  2. BRs 12.64 croreCorrect
  3. CRs 1.26 crore
  4. DRs 6.32 crore

Explanation

10-day VaR = 1-day VaR x sqrt(10) = 4 x 3.16 = Rs 12.64 crore. Multiplying by 10 (Rs 40 crore) wrongly scales linearly with time. Dividing by 3.16 gives Rs 1.26 crore, which is the wrong direction.

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