Skip to content

FRM Part II · FRM Exam Part II · VaR Mapping

A trader holds a long position in an at-the-money call option. The risk system measures VaR using a delta-normal mapping, and a separate full-revaluation simulation is run on the same position at the same confidence level for a large adverse move in the underlying. Which statement best describes the relationship between the two results?

Delta-normal VaR overstates the loss for a long call. The linear approximation ignores positive gamma, which means the option loses less than delta alone predicts on a large fall in the underlying. Full revaluation captures this convexity and gives a smaller loss estimate.

  1. ADelta-normal VaR understates the loss because it ignores the option's negative gamma
  2. BDelta-normal VaR overstates the loss because it ignores the positive convexity that cushions large declinesCorrect
  3. CBoth methods give the same VaR because the option is at the money
  4. DDelta-normal VaR is unrelated to full revaluation because it depends only on theta

Explanation

A long option has positive gamma. When the underlying falls sharply, the true value falls by less than the linear delta approximation suggests. The delta-normal loss is therefore larger than the full-revaluation loss. Option 0 is wrong because a long option has positive, not negative, gamma.

Did you get it right without looking?

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

Practise VaR MappingFree diagnostic mock

More VaR Mapping questions