VALUE AT RISK
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What does Value at Risk (VaR) measure in risk management?
VaR measures the maximum potential loss in the value of a portfolio over a defined period for a given confidence interval. It quantifies market risk by estimating the worst expected loss under normal market conditions.
What does the term 'loss distribution' refer to in VaR analysis?
Statistical distribution of potential portfolio losses over a time horizon
What are the three key parameters that define a VaR estimate?
The three key parameters are the confidence level (e.g., 99%), the holding period or time horizon (e.g., 1 day or 10 days), and the amount of loss expressed in monetary terms or percentage.
What is parametric VaR and how does it differ from non-parametric VaR?
Parametric VaR assumes a distribution; non-parametric uses actual historical data
What confidence level does the Basel Committee prescribe for internal models approach (IMA) VaR calculation?
The Basel Committee prescribes a 99% one-tailed confidence level for VaR calculation under the Internal Models Approach. This means the loss is expected to exceed VaR on only 1% of trading days.
What is the minimum historical observation period for Historical Simulation VaR under Basel II?
At least one year (250 trading days) of historical data
What is the holding period prescribed by Basel II for computing VaR for market risk capital?
Basel II prescribes a 10-day holding period (two calendar weeks) for computing VaR for market risk capital requirements. This reflects the time needed to liquidate or hedge a typical trading position.
What is the 'full valuation' approach in Monte Carlo VaR?
Repricing entire portfolio under each simulated scenario rather than using approximations
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