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FRM Part II · FRM Exam Part II · Estimating Market Risk Measures: An Introduction and Overview

A risk manager reports a one-day 99% VaR of USD 2.0 million for a trading desk whose daily P&L is assumed to be normally distributed with zero mean. Which statement about this figure is correct?

A 99% one-day VaR of USD 2.0 million means losses should be at or below that level on about 99% of days, while on the other 1% they may be larger by an unspecified amount. VaR is a quantile and gives no information about tail severity.

  1. AThe desk is expected to lose exactly USD 2.0 million on the worst day in every 100 days
  2. BThe desk is expected to lose no more than USD 2.0 million on 99% of days, and the loss on the remaining days can exceed it by an unspecified amountCorrect
  3. CThe desk's average loss on days when the VaR is breached equals USD 2.0 million
  4. DThe desk will never lose more than USD 2.0 million in a single day

Explanation

VaR is a quantile of the loss distribution: with 99% confidence the loss will not exceed the VaR. It says nothing about how large losses are beyond that point. The option on average loss in breaches describes expected shortfall, not VaR.

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