CMA Final · Strategic Financial Management · Risks in Financial Market
Kaveri Ltd has a Rs 80 crore one-day 99% VaR of Rs 4 crore for a bond book, using z = 2.33 at 99%. Assuming returns are independent and identically distributed, what is the approximate 10-day 99% VaR (use square root of time, sqrt10 = 3.162)?
The 10-day VaR is about Rs 12.65 crore. With independent identically distributed returns, risk scales with the square root of time, so the one-day VaR of Rs 4 crore is multiplied by 3.162. Multiplying by 10 would overstate it.
- ARs 40.00 crore
- BRs 12.65 croreCorrect
- CRs 9.32 crore
- DRs 4.00 crore
Explanation
Under the square-root-of-time rule, 10-day VaR = 1-day VaR x sqrt(10) = 4 x 3.162 = Rs 12.65 crore. Rs 40 crore wrongly multiplies by 10 (linear scaling). Rs 9.32 crore wrongly multiplies by 2.33 again.
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