FRM Part II · FRM Exam Part II · VaR Mapping
A bond has a modified duration of 4.0 and a market value of USD 50 million. Under duration mapping, the risk manager uses a risk factor with yield volatility of 0.80% per year (absolute yield change), and the 95% confidence factor is 1.645 on a one-year horizon. What is the approximate annual VaR?
VaR equals 1.645 times modified duration 4.0 times USD 50 million times 0.80% yield volatility, which gives about USD 2.63 million. Duration translates the yield move into a percentage price move, and the confidence factor scales it to 95%.
- AUSD 1.32 million
- BUSD 2.63 millionCorrect
- CUSD 3.29 million
- DUSD 0.66 million
Explanation
VaR = 1.645 x modified duration x market value x yield volatility = 1.645 x 4.0 x 50 x 0.008 = USD 2.632 million. USD 1.32 million results from using a duration of 2 (halving). USD 3.29 million results from using 2.0 as the confidence factor.
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