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FRM Part II · FRM Exam Part II · VaR Mapping

A portfolio contains a long forward on an equity index. In a delta-normal VaR mapping, the forward is represented by positions in the spot index and a risk-free zero-coupon bond. Which statement best describes the mapped position?

A long equity index forward maps to a long position in the index, adjusted for dividends, funded by a short zero-coupon bond maturing at delivery with face value equal to the forward price, since the holder must pay a fixed amount at maturity.

  1. ALong the index (adjusted for dividend yield) and short a zero-coupon bond maturing at the forward's delivery dateCorrect
  2. BShort the index and long a zero-coupon bond
  3. CLong the zero-coupon bond only, since the index is not tradable
  4. DLong the index and long a zero-coupon bond

Explanation

A long forward on an index means receiving the index at maturity and paying the fixed forward price. This equals a long position in the index (present value adjusted for dividends) financed by borrowing, which is a short zero-coupon bond with face equal to the delivery price. The two-long option ignores the payment obligation.

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