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CA Final · Advanced Financial Management · Risk Management

A treasury desk at a Chennai bank computes a 1-day 99% VaR of Rs 4 crore for a bond portfolio using z = 2.33. Assuming returns are independent and identically distributed with zero mean, what is the approximate 9-day 99% VaR, using the square-root-of-time rule?

The 9-day 99% VaR is about Rs 12 crore. Under independent, identically distributed zero-mean returns, VaR grows with the square root of the horizon, so Rs 4 crore multiplied by the square root of 9, which is 3, gives Rs 12 crore.

  1. ARs 36 crore
  2. BRs 12 croreCorrect
  3. CRs 4 crore
  4. DRs 18 crore

Explanation

VaR scales with the square root of time: 4 x sqrt(9) = 4 x 3 = Rs 12 crore. Rs 36 crore scales linearly with time, which ignores that variance, not standard deviation, grows proportionally with time.

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