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 5 million. Which interpretation is correct?
A 99% one-day VaR of USD 5 million means losses larger than that amount should occur on roughly 1% of days. It is a quantile threshold, not a maximum possible loss and not the average tail loss.
- AOver many days, losses exceeding USD 5 million would be expected on about 1% of daysCorrect
- BThe maximum loss over the next day is USD 5 million
- CThe average loss on the worst 1% of days is USD 5 million
- DA loss of at least USD 5 million is expected on 99% of days
Explanation
VaR is a quantile: with 99% confidence, loss will not exceed it, so exceedances are expected about 1% of the time. It is not a maximum loss, nor the tail average (that is ES).
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