14. An organizations 5% daily VaR shows a number fairly consistently around 3 million. A backtest of

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14. An organization’s 5% daily VaR shows a number fairly consistently around €3 million.

A backtest of the calculation reveals that, as expected under the calculation, daily portfolio losses in excess of €3 million tend to occur about once a month. When such losses do occur, however, they typically are more than double the VaR estimate. The portfolio contains a very large short options position.

A. Is the VaR calculation accurate?

B. How can the VaR figure best be interpreted?

C. What additional measures might the organization take to increase the accuracy of its overall exposure assessments?

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Derivatives

ISBN: 9781119850571

1st Edition

Authors: CFA Institute

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