Hi,

I think that your explanation for Statement II below is incorrect:

The explanation says:

“Statement II is incorrect as there is a 95% (and not 5%) probability that the bank’s losses will exceed $253m”

Since there is a 5% chance that the losses will exceed $253, should it say the following?:

“Statement II is incorrect as there is a 95% (and not 5%) probability that the bank’s losses will *NOT* exceed $253m”

Thanks

Question 14 : A statement in the annual report of a bank states that the 10-day VaR at the 95% level of confidence at the end of the year is $253m. Which of the following is true:

I. The maximum loss that the bank is exposed to over a 10-day period is $253m.

II. There is a 5% probability that the bank’s losses will not exceed $253m

III. The maximum loss in value that is expected to be equaled or exceeded only 5% of the time is $253m

IV. The bank’s regulatory capital assets are equal to $253m

(a) I and III

(b) II and IV

(c) I and IV

(d) III only

Your Answer is Correct

The correct answer is choice ‘d’

Statement I is not correct as VaR does not set an upper limit on losses. In this case, the bank expects the losses to exceed $253m 5% of the times, and the VaR number does not indicate any theoretical maximum amount of losses.

Statement II is incorrect as there is a 95% (and not 5%) probability that the bank’s losses will exceed $253m

Statement III is correct and describes VaR.

Statement IV is incorrect, as regulatory capital is a more complex computation for which VaR is only one of the various input.

Therefore Choice ‘d’ is the correct answer.