PRM 3 – Question 40 VaR

[Jeffrey Chudy]

PRM 3 – Question 40 VaR

[Anonymous]

Hi, I believe the decimal in the answer is in the wrong place.
Currently: (in this case, EUR 15m x 1.5 = USD 2.25m)
Corrected: (in this case, EUR 15m x 1.5 = USD 22.5m)

Thanks
Jeff

Question 40 : For a US based investor, what is the 10-day value-at risk at the 95% confidence level of a long spot position of EUR 15m, where the volatility of the underlying exchange rate is 16% annually. The current spot rate for EUR is 1.5. (Assume 250 trading days in a year).
(a) $1,184,400
(b) $526,400
(c) $2,632,000
(d) $5,922,000

Your Answer is Incorrect

The correct answer is choice ‘a’

The VaR for a spot FX position is merely a function of the standard deviation of the exchange rate. If V be the value of the position (in this case, EUR 15m x 1.5 = USD 2.25m), z the appropriate z value associated with the level of confidence desired, and ? be the standard deviation of the portfolio, the VaR is given by Z?V.

In this case, the 10-day standard deviation is given by SQRT(10/250)*16%. Therefore the VaR is =1.645*15*1.5*(16%*SQRT(10/250)) = USD 1.1844m. Choice ‘a’ is the correct answer.

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