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CMA Final · Strategic Financial Management · Risks in Financial Market

Ananya Textiles has a one-day 99% VaR of Rs 4 crore on its treasury portfolio. Assuming returns are independent and identically distributed with zero mean, what is the approximate 25-day 99% VaR using the square-root-of-time rule?

The 25-day VaR is Rs 20 crore. Under independent, identically distributed returns, risk scales with the square root of time, so the one-day VaR of Rs 4 crore is multiplied by the square root of 25, which is 5.

  1. ARs 20 croreCorrect
  2. BRs 100 crore
  3. CRs 16 crore
  4. DRs 8 crore

Explanation

Multi-day VaR = one-day VaR x square root of days = 4 x 5 = Rs 20 crore. Rs 100 crore scales linearly (4 x 25), which is the wrong scaling. Rs 8 crore uses the square root of 4 instead of 25.

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