CMA Final · Strategic Financial Management · Risks in Financial Market
The 1-day 95% VaR of a treasury position is Rs 2 crore, using z = 1.65 and assuming returns are independent and normally distributed. Using the square-root-of-time rule, what is the 10-day 95% VaR (approx.)?
The 10-day 95% VaR is about Rs 6.32 crore. Under independent, normally distributed returns, VaR scales with the square root of the horizon, so the one-day figure of Rs 2 crore is multiplied by the square root of 10, about 3.162.
- ARs 6.32 croreCorrect
- BRs 20.00 crore
- CRs 3.30 crore
- DRs 4.47 crore
Explanation
10-day VaR = 1-day VaR x sqrt(10) = 2 x 3.162 = Rs 6.32 crore. Rs 20 crore multiplies by 10 directly, ignoring that risk scales with the square root of time. Rs 4.47 crore uses sqrt(5), a wrong time factor. Rs 3.30 crore multiplies by 1.65 again.
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