2011 CFA Sample Exam Session 1 Q 28 - Risk management/budgting

CFA Level III Derivatives
#1

Why the A is incorrect? Since the VAR is same, they should have the same risk budgets. ( Book 5, p 261)

regarding B, I think fixed income desk generates better return on the allocation of capital, but worse return on the VAR, correct?

is my understanding right?

thanks in advance

#2

2011 CFA Sample Exam Session 1 Q 28 - Risk management/budgting—??

Session 1 means AM??

Sample exam = Mock ??

#3

oh… 2011 Sample Exam, not Mock. And since there are two session exams in the mock, session one means the first 30 questions. :slight_smile:

#4

repost to raise your attention, thx

#5

If you are asked for risk budgeting, it could be just VAR. But here it’s VAR and capital. Yes, A could be correct in some sense, but CFAI’s exam answer can’t never be that STRAIGHTFORWARD…Any way, C is the best answer.

#6

FI desk

Allocated capital = 200, profit = 25 (25/200 = 12.5%), VAR = 5 ( 5 /200 = 2.50% of allocated capital)

FX desk

Allocated capital = 100, profit = 20 (20/100 = 20%), VAR = 5 (5/100 = 5% of allocated capital)

Close down FX desk & allocate capital to FI desk

Allocated capital = 200+100 = 300, profit = 12.5% of 300 = 37.50, VAR = 2.5% of 300 = 7.50

Hence lower return on capital but a higher return on VAR

Note: There is a confirmed errata on the page.