Value at Risk Quiz 4

vandana.jain
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Value at Risk Quiz 4

Postby vandana.jain » Tue Sep 11, 2012 1:32 pm

An American bank has a cash position of €1 million. The euro exchange rate is 0.95 USD/EUR. The 1-day euro exchange rate is normally distributed with mean 0.96 and standard deviation 0.01. Compute the 1-day VaR with 99% confidence (in USD)
Choose one answer.
a. $50,000
b. $9,600
c. $19,600
d. $16,500

he correct answer is: $9,600. Lower EUR = 0.96- 1.96 × 0.01 = 0.9404; 1m EUR = $9,40,400; VaR = $950,000 - $9,40,400= $9,600.

i just want to know why r we subtracting it from spot rate...
$950,000 - $9,40,400

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shreyas
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Re: Value at Risk Quiz 4

Postby shreyas » Thu Sep 13, 2012 2:27 pm

VAR is calculated for a position. Here the investor is exposed to the currency risk so VAR is calculated on the investor's currency position that is the spot rate, after calculating how the currency deviates from the mean

d2syh
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Re: Value at Risk Quiz 4

Postby d2syh » Thu Oct 04, 2012 8:24 am

How is the value 1.96 derived?

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shreyas
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Re: Value at Risk Quiz 4

Postby shreyas » Sat Oct 06, 2012 4:54 pm

These are the z values associated with each confidence level. For 95% confidence level the z value is 1.65 and for 99% confidence level the z value is 2.56 for a two tail test.

sam.kanwar
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Re: Value at Risk Quiz 4

Postby sam.kanwar » Sun Oct 07, 2012 8:33 pm

Shouldn't it be 2.33 instead of 1.96 as VAR Is always 1 tailed and for 99 percent 1 tailed z value is 2.33

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shreyas
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Re: Value at Risk Quiz 4

Postby shreyas » Mon Oct 08, 2012 6:49 pm

You are correct the value used to be 2.33.
Thanks for making us note of it. We will correct it from our end.


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