Question

Use the following statement for questions. Assume that we have a portfolio of $16,500,000 of securities with a daily VaR of 2.35% at the 99% confidence interval.

(17) What is the annual VaR at the 99% confidence interval and what conversion factor would we use?

Annual VaR Conversion Factor

(a) 8.1% 12

(b) 16.9% 52

(c) 37.2% 250

(d) 44.9% 365

(18) What is the closest approximation of our $VaR and what does that mean?

$VaR Meaning

(a) $1,336,500 99% confidence we will not gain more than this in a year

(b) $6,138,000 99% confidence we will not lose more than this in a year

(c) $2,788,500 99% confidence we will not gain more than this in a year

(d) $7,408,000 99% confidence we will not lose more than this in a year

Answer 1

Portfolio value =$16,500,000

Daily VaR = 2.35% at the 99% confidence interval.

(17) What is the annual VaR at the 99% confidence interval and what conversion factor would we use?

Annual VaR Conversion Factor

(a) 8.1% 12

(b) 16.9% 52

(c) 37.2% 250

(d) 44.9% 365

Correct Answer: (c) 37.2% 250

Assume number of trading days in a year = 250

Annual VAR = Daily VAR * 250^1/2 or

Substiturting values:

This works out to 37.2%

(18) What is the closest approximation of our $VaR and what does that mean?

$VaR Meaning

(a) $1,336,500 99% confidence we will not gain more than this in a year

(b) $6,138,000 99% confidence we will not lose more than this in a year

(c) $2,788,500 99% confidence we will not gain more than this in a year

(d) $7,408,000 99% confidence we will not lose more than this in a year

Correct answer is (b) $6,138,000 99% confidence we will not lose more than this in a year

daily Var*portfolio value*underroot 250 = 2.35%*16500000*250^1/2=6130865.81. This is closest to option b.