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ACCA Strategic Professional · Advanced Financial Management · The role of the treasury function in multinationals

Kiro Group has a treasury policy limiting the loss on its derivative positions to 2% of group equity, measured at 95% confidence over one day. Group equity is 600 million. The treasury's one-day 95% VaR is calculated as 1.65 x daily standard deviation of 5 million. What is the VaR, and is the limit met?

The one-day 95% VaR is 1.65 multiplied by 5 million, giving 8.25 million. The policy limit is 2% of 600 million equity, which is 12 million. Because 8.25 million is below 12 million, the limit is met and there is no breach.

  1. AVaR 8.25 million; limit of 12 million is metCorrect
  2. BVaR 8.25 million; limit of 12 million is breached
  3. CVaR 5.0 million; limit of 12 million is met
  4. DVaR 8.25 million; limit of 6 million is breached

Explanation

VaR = 1.65 x 5 = 8.25 million. The limit is 2% x 600 = 12 million. Since 8.25 is below 12, the limit is met. Using a wrong limit such as 6 million would wrongly suggest a breach.

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