Skip to content

FRM Part I · FRM Exam Part I · Calculating and Applying VaR

A portfolio manager notes that a bank's 99% one-day VaR is 4 million. Which interpretation of this figure is correct?

A 99% one-day VaR of 4 million means there is a 1% probability that the loss over one day will exceed 4 million. It is a quantile and gives no information about how large losses beyond that level might be.

  1. AThe bank expects to lose exactly 4 million on the worst day in a hundred
  2. BOver a one-day horizon, losses are expected to exceed 4 million with 1% probabilityCorrect
  3. CThe average loss on days when the loss exceeds VaR is 4 million
  4. DThe maximum possible one-day loss is 4 million

Explanation

VaR is a quantile of the loss distribution: the loss level exceeded with probability 1% over the horizon. It says nothing about the size of losses beyond VaR, which is the job of expected shortfall. The average tail loss and the maximum loss interpretations are therefore wrong.

Did you get it right without looking?

One question tells you little. A timed set on Calculating and Applying VaR shows your real accuracy, how long you take and where you lose marks.

Practise Calculating and Applying VaRFree diagnostic mock

More Calculating and Applying VaR questions