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FRM Part II · FRM Exam Part II · VaR Mapping

A trader holds a call option on 10,000 shares of a stock trading at $50. The option's delta is 0.6. Under delta-normal mapping, what position in the underlying stock, in dollar terms, should the option be mapped to for VaR purposes?

The option maps to $300,000 of stock. Delta-normal mapping replaces the option with delta times the underlying's market value: 0.6 × 10,000 shares × $50. Using the full $500,000 notional ignores delta and overstates the exposure.

  1. A$500,000
  2. B$300,000Correct
  3. C$30,000
  4. D$200,000

Explanation

Delta-normal mapping replaces the option with its delta-equivalent position in the underlying: 0.6 × 10,000 × $50 = $300,000. Using the full notional of $500,000 ignores delta. Using 1 − delta (0.4) gives $200,000, which is also wrong.

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