Daily VaR

CFA Level III Derivatives
#1

This is from a Schweser Q-Bank question and for some reason, I’m not seeing why they chose -1.87% as the reference return…HELP!

Gregory Chambers is interested in estimating the daily VAR (with 99% probability) of bank’s fixed income portfolio, currently valued at $30 million. The portfolio has the following returns over the past 200 days (ranked from high to low).

1.9%, 1.87%, 1.85%, 1.79%…-1.78%, -1.81%, -1.84%, -1.87%, -1.91%

What will be the VAR estimate using the historical method?

A) $978,000

B) $561,000

C) $570,000

ANSWER:

VAR = (-0.0187)(30,000,000) = -$561,000 therefore the 1% daily value at risk is $561,000.

#2

Might have figured it out, but anyone’s verification would be appreciated.

Is it because in historical VaR, you just take rank the expected returns and if there are 200 days of returns and we’re only focused on the 1% VaR (99% confidence), then 1% of 200 days of returns is 2, meaning we look at the 2nd worst return over those 200 days and that’s our minimum VaR at the 1% significance level? So we multiply -0.0187 by our NP to allow us to say ‘there is a 1% probability that the portfolio value will experience a loss of $561,000 or more in any given day?’

#3

Do you like Phil Collins?

#4

@Phil Collins: Yes, you are right. Thats how its done.