Economic Capital and VAR

[Helen]

Economic Capital and VAR

[Anonymous]

Can you confirm if the calcuation of the below is accurate?

This is on page 108, under example 11.A.2.9, where delta approximation is used to calcuate the var.
The author calculates it as follows:

0.591 * 1.645 * 0.25/5 = 0.0486.

I am confused of the use of ‘0.25’. This is the annual volatility of the underlying. Shouldn’t it have been converted to a daily volatility : i.e. 0.25/(root of 250)?

[Anonymous]

HH,

Your approach is absolutely right, and so is the book. The 0.25 is the annual volatility of the underlying. It has been converted to a volatility of 10 days (as we are calculating VaR over a 10-day period and not one day) by multiplying by root of 10/250 = 1/5. That is where the “0.25/5” is coming from, ie 0.25 * (root of 10/250).

Best regards,
Mukul

[Author]

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