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FRM Part II · FRM Exam Part II · VaR Mapping

A risk manager at a global asset manager must compute VaR for a portfolio containing thousands of positions, including bonds with many different maturities. Which statement best describes the main purpose of VaR mapping?

VaR mapping replaces each position with exposures to a small set of standard risk factors, such as vertices on the yield curve or market indices. This shrinks the covariance matrix and makes risk calculation feasible and consistent across many instruments with differing characteristics.

  1. ATo replace each position with exposures to a limited set of standard risk factors, so that the risk measurement system remains tractableCorrect
  2. BTo adjust reported VaR upward so that it equals expected shortfall at the same confidence level
  3. CTo eliminate all idiosyncratic risk from the portfolio before measuring it
  4. DTo convert historical returns into risk-neutral returns for pricing

Explanation

VaR mapping decomposes instruments into exposures to a manageable set of primary risk factors (e.g., zero-coupon bond vertices, equity indices, FX rates). This reduces the dimensionality of the covariance matrix and makes the computation feasible. The other options describe unrelated tasks.

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