VaR

Question 1

Which tail is used for VaR?

Answer 1

Left

Question 2

When did computers add calculation muscle to risk?

Answer 2

1980

Question 3

two types of financial institutions that primarily drive risk

Answer 3

private equity and hedge funds

Question 4

5 steps of enterprise risk management

Answer 4

1. risk transparency and insight
2. natural ownership and risk strategy
3. risk capacity
4. risk-related decisions and processes
5. risk organization and governance

Question 5

investment bank that risks the most money

Answer 5

goldmann sachs

Question 6

when did G10 agree to set minimum capital requirements?

Answer 6

1988

Question 7

when were banks allowed to use their own proprietary models?

Answer 7

1995

Question 8

VaR level with 95% confidence

Answer 8

“I am 95% confident that I will not lose more than $xx in one day”

Question 9

what does a closed form of VaR assume?

Answer 9

• normal distribution

- distribution with a specific mean and standard deviation

Question 10

what does closed form of VaR explicitly determine?

Answer 10

the p/l probability distribution for a portfolio

Question 11

what does closed form VaR implicitly determine?

Answer 11

the standard deviation and correlation of p/l

Question 12

confidence interval recommended by Basle Committee?

Answer 12

99 percent

Question 13

properties of a normal curve

Answer 13

• perfectly symmetric
• no skew
• mean = 0
• kurtosis = 3 x variance squared

Question 14

what do fat tails suggest

Answer 14

a higher chance of very high or very low prices

Question 15

when is fat tails classified

Answer 15

when kurtosis > 3

Question 16

are options linear or non-linear

Answer 16

options are non linear , price of option doesn’t move 1 to 1 with the price of the underlying

Question 17

how are portfolios with optionality measured?

Answer 17

by using simulations/estimations of VaR

Question 18

factors effecting simulations/estimations of VaR

Answer 18

options (delta, theta, gamma)
bonds (complexity and duration)
equities (beta)

Question 19

curse of dimensionality

Answer 19

multiple risk factors create exponential layers of calculations

Question 20

models that estimate VaR and open-form equations

Answer 20

Historical and Monte Carlo

historical uses past events to predict the probability of future events

monte carlo incorporates all risk factors into complex calculations

Question 21

error that occurs with Monte Carlo VaR

Answer 21

specification error = random sampling of risk metrics doesn’t represent true distribution

convergence error = not enough sampling is done

Question 22

VaR model to use if no optionality

Answer 22

Parametric (variance or covariance) VaR

Question 23

VaR model with curse of dimensionality

Answer 23

Monte Carlo

Question 24

distribution kurtosis type for enegry markets? opposite?

Answer 24

Leptokurtotic = woody, concentrated center with fat tails
opposite = platokurtotic

Question 25

two types of VaR model likely to give errors in energy market

Answer 25

parametric and historical

Question 26

concepts to consider in overcoming VaR limitations

Answer 26

- use stress tests and scenario analysis | - VaR gives probability of a loss that could occur past a certain $xx, but doesn't specify how far $xx that loss will go

Question 27

3 types of stress tests

Answer 27

1. historical scenarios (using past tail risk events) 2. mechanical stress tests (yield curve shifts, forward price curve shifts, changes in volatility curve) 3. hypothetical scenarios (user-designed)

Question 28

shocks that can be used in stress tests

Answer 28

``` parallel= equal shocks given across the curve twist = equal shocks given to high/low end of curve but with different signs (+, -) curvature = equal shocks given to high/low end of curve but with the same sign. same shock is also applied to the center of the curve but w/ a different sign ```

Question 29

problems with stress tests

Answer 29

1. subjective 2. no probability 3. information overload