Question #6 - Reading 37 Measuring and Managing Market Risk

Reading: Reading 37 Measuring and Managing Market Risk

PDF File: Reading 37 Measuring and Managing Market Risk.pdf

Page: 3

Status: Unattempted

Correct Answer: A

Shared Context

- Which of the following is closest to 5% daily VaR for the data included in Exhibit 1? A) £126,000. B) £156,000. C) £186,000.

Question

Which of the following is most accurate about Smith's comments?

Answer Choices:

A. Only comment 1 is correct

B. Only comment 2 is correct

Explanation

Comment 1 is incorrect. VaR is interpreted as the minimum loss that will be experienced X% of the time; losses estimated will be bigger. Comment 2 is correct. Using historic parameters will only be of use if the future period is expected to be similar to the look-back period. For example, if the look- back period had an unusually low volatility then VaR based on this measure would underestimate losses.

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