Risk Management - Larsson Case Study

CFA Level III Derivatives
#1

Hello all.

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I understand why “the combined VAR of the trading desks is less than 20m” is TRUE

I understand why “the fixed income desk generates better returns on its allocated capital given VaR” is FALSE

But I dont understand why “the trading desk have the same risk budget” is FALSE. Isnt risk budget represented by VAR amount?

VAR (Equity desk) = VAR (Fixed income desk) = 10 --> same risk budget?? --> therefore TRUE??

Anyone can help?

#2

Anyone?

#3

What is the source of this question - I couldn’t find it in the 2016 CFAI materials.

If VaR are = then your risk budget is identical - although not equivalent if you compare it to the capital deployed.

#4

Topic test. Not sure if u have access to the material, but all the relevant material is stated above.

The complete question was as follows:

With regard to the fixed income and equity trading desks, based on Exhibit 1, which of the following statements is most likely accurate?

-The trading desks have the same risk budget.** -The fixed-income desk generates better returns on its allocated capital given its VaR. **-The combined daily VaR of the trading desks is less than SEK20 million.

Let me know what u think. Thnks

#5

C is the answer - however A is also correct based on the way it is worded and as defined by the text. I think it might be worth writing to the CFA.

Excerpt from the text from pg 183 (emphasis added) -

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#6

Great. I also noted the wording in the textbook as well.

Thanks loads. Will write to CFAI.

#7

This question is ticking me off along with several others I have come across where the wording is absolutely ****-poor and very unclear. Did you ever get a resolution to this?

Someone please comment on why B is false. If “given Var” aren’t we “ignoring” it? If not - what is meant by the term “given”?

The return on allocated capital is obviously better for the fixed income desk, based on allocated capital, but worse based on VaR allocation, which is not what the question asks, unless “given” somehow modifies this in a way that is incomprehensible to me.

#8

bump

#9

you are evaluating the two desks based on the VAR # - that is all it means.

The construct is a straight forward english construct - and NO - it does not mean you are ignoring the VAR - you are most definitely using it.

#10

thanks cp

#11

Can someone clarify? Maybe pinging S2000magician ? Also, any response from CFAI?

Reading 25, Section 6.1.1 paragraph 3 notes that same allocated VaR means they have the same risk budget.

Not sure if relevant or another mistake - initially the questions says the FI desk has SEK 10 million VaR for five day period, but when showing the table they preface that risk budgets are based on daily VaR. No further clarification is made on what the table depicts.

Edit: the answer notes specifically daily VaR will be lower, technically Daily VaR would be even lower than SEK 20 million due to (1) diversification benefit and (2) measuring FI VaR from five day (SEK 10mm) to daily (less than SEK 10mm). I guess it is the most correct in this case

#12

Maybe they meant Return on VAR?

#13

I assumed it meant Var/Capital…as in the amount of var they were allocated to capital. FI has 10% and Equity had 5%, thus not the same. But 6.1.1. does say they are the same, with different levels of capital. I chalk this one up to poorly worded.

#14

For your question, it says in regards to his estimate, which is 2 paragraphs above the table.