Skip to content

FRM Part I · FRM Exam Part I · Calculating and Applying VaR

Compared with historical simulation, which statement about Monte Carlo simulation VaR for a portfolio containing options is most accurate?

Monte Carlo VaR can fully reprice nonlinear instruments such as options in every scenario, but it is computationally demanding and its results depend on the assumed stochastic process and parameters, so it carries model risk.

  1. AIt cannot capture nonlinear payoffs because it relies on delta approximations
  2. BIt can fully reprice nonlinear positions in each scenario but is computationally intensive and depends on the assumed return modelCorrect
  3. CIt avoids model risk because scenarios come from observed data
  4. DIt always gives a lower VaR than the delta-normal method

Explanation

Monte Carlo can use full revaluation, capturing nonlinearity such as gamma, at high computational cost. Its results depend on assumed distributions and parameters, so model risk exists. It does not rely on observed scenarios and need not produce lower VaR than delta-normal.

Did you get it right without looking?

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

Practise Calculating and Applying VaRFree diagnostic mock

More Calculating and Applying VaR questions