Suppose that a trading desk has a one-day 95% value-at-risk of $350,000. What is its five-day 95% value-at-risk? Explain the assumptions that you make.

Expert Solution

The N-day Value at Risk(VaR) is calculated as √N times the One day VaR

Therefore, 5 day 95% VaR = One day VaR * (5)^0.5

= 350000* 5^0.5

= $782623.79

Assumptions are:

i) Past records are reasonable indicators of the Future

ii) Day to day Fluctuations are independent (Random walk hypothesis)

iii) Non- negativity i.e. Financial Assets cannot have negative prices

iv) Time Consistency : Single period assumptions hold over multiple periods

v) Fluctuations in Daily returns follow a normal distribution

5 day 95% VaR = $782623.79

Umair answered 1 year ago

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