FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods
A portfolio has a value of USD 200 million. Using a parametric normal approach with annual volatility of 15% and 250 trading days, the one-day 99% VaR (z = 2.33) is estimated. Which is the closest result?
One-day 99% VaR is about USD 4.42 million. Daily volatility is 15% divided by the square root of 250, roughly 0.949%, which gives a dollar standard deviation of about 1.90 million; multiplying by 2.33 yields 4.42 million.
- AUSD 4.42 millionCorrect
- BUSD 6.99 million
- CUSD 0.44 million
- DUSD 1.77 million
Explanation
Daily volatility = 15%/sqrt(250) = 0.9487%. Dollar sigma = 200m x 0.009487 = 1.897m. VaR = 2.33 x 1.897m = 4.42m. Using 15% without scaling gives 69.9m; dividing by 250 instead of its root gives a far smaller number.
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