## VaR

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

### VaR

Pls explain:

Consider the following single bond of \$10 million, a modified duration of 3.6 yrs and annualized yield of 2% and annual standard deviation of 3%; Using the duration method and assuming that the daily return on the bond position is independently identically normally distributed, calculate the 10 day holding period VaR of the position with a 99% confidence interval, assuming there are 252 days in a year.
Choose one answer.
a. 334,186
b. 699, 000
c. 139240
d. 144840

Pristine Solution: The correct answer is 334,186. VAR = \$10,000,000* 0.02*3.6* [sqrt10/ (sqrt252)]* 2.33 = \$334,186

Why they have multiplied with annualized yield instead of annual std deviation??

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

### Re: VaR

Hi Suresh,

This question deals with bonds. The measure of risk in bonds is given by Duration * change in yields.. The standard deviation here is not relevant. In fact, it is wrong
Standard deviation should be Duration * Change in yields.

Remember, VaR for a Bond Portfolio is:
z * Market Value * Duration * Change in yields for the period..

Here, since annual yield change is given, then it needs to be unannualized.

Hope this helps

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

### Re: VaR

Thanks!

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