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

A bank's trading book holds a position whose 1-day 99% Value at Risk (VaR) is Rs 4 crore, estimated with a parametric (variance-covariance) model assuming normally distributed returns. Using the square-root-of-time rule, what is the 10-day 99% VaR?

The 10-day VaR is about Rs 12.65 crore. Under the square-root-of-time rule, VaR scales with the square root of the horizon, so Rs 4 crore is multiplied by the square root of 10, roughly 3.162, not by 10.

  1. ARs 12.65 crore (approximately)Correct
  2. BRs 40 crore
  3. CRs 8.94 crore (approximately)
  4. DRs 1.26 crore (approximately)

Explanation

10-day VaR = 1-day VaR x sqrt(10) = 4 x 3.1623 = Rs 12.65 crore. Rs 40 crore multiplies by 10 instead of the square root of 10, which wrongly assumes perfect time-linear scaling. Rs 8.94 crore uses sqrt(5) and Rs 1.26 crore divides by sqrt(10).

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