FRM Part I · FRM Exam Part I · Calculating and Applying VaR
A portfolio has a value of USD 50 million. Daily returns are assumed normally distributed with a mean of zero and a standard deviation of 1.2%. Using the z-value of 2.33 for 99% one-tailed confidence, what is the one-day 99% parametric VaR?
The one-day 99% VaR is USD 1.398 million. Multiply the z-value 2.33 by the 1.2% daily volatility to get 2.796%, then apply this to the USD 50 million portfolio value, assuming a zero mean return.
- AUSD 1.398 millionCorrect
- BUSD 0.600 million
- CUSD 1.980 million
- DUSD 2.796 million
Explanation
VaR = 2.33 × 1.2% × 50 million = 2.796% × 50 million = USD 1.398 million. Using 2.33 × 1.2% = 2.796% of 50 million gives 1.398 million. The USD 2.796 million option forgets that 2.796% must be applied to USD 50 million correctly, doubling the result.
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