## Value at Risk Quiz 4

vandana.jain
Finance Junkie
Posts: 41
Joined: Tue Jul 24, 2012 4:56 pm

### Value at Risk Quiz 4

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)
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
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

### Re: Value at Risk Quiz 4

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
Good Student
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Joined: Fri Aug 17, 2012 3:27 pm

### Re: Value at Risk Quiz 4

How is the value 1.96 derived?

shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

### Re: Value at Risk Quiz 4

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
Posts: 1
Joined: Thu Sep 06, 2012 8:53 am

### Re: Value at Risk Quiz 4

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

shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

### Re: Value at Risk Quiz 4

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