FRM II-or7

anbu.edu
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FRM II-or7

Postby anbu.edu » Fri Oct 17, 2014 10:09 am

In which of the following positions is the value at risk (VaR) most likely to exceed the
liquidity at risk (LaR)?
a) Short-term exposure on a portfolio of long European-style options
b) Long-term exposure on a portfolio of short European-style options
c) Long market risk position hedged with short position in futures contract with low
basis risk
d) Short market risk position hedged with long position in futures contract with low
basis risk

The answer is A
Question from BT
i dont know how to approch this question, please help

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

FRM II-or7

Postby edupristine » Sat Oct 18, 2014 4:44 am

Hi anbu.edu,

A portfolio of long only European style option positions generates no cash flows until the position is sold or the options expire.

This market risk position will have a positive VaR but little or almost no cash flows i.e negligible LaR. Hence, in this case VaR will dwarf LaR.


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