Value at Risk 2

Question 1

Monte Carlo method makes use of random number generator to create vast amount of simulations. But, what is the excel function to generate a random number?

Answer 1

=Rand()

Generates a random number between 0 - 1 used as confidence intervals.

Question 2

Historical Simulation method uses price history to generate VaR measures. What is the excel function to generate VaR (%)?

Answer 2

=PERCENTILE.EXC(ARRAY, (1-CI))

Generates VaR (%) of given price series at a certain confidence interval

Question 3

Which VaR measure (HS, MC or VCV) does not assume normality?

Normal distribution of returns

Answer 3

Historical Simulation

Can take into consideration extreme (fat tailed) losses.

Question 4

Which measure can calculate losses beyond a given confidence interval?

Answer 4

CVaR

Confitional Value at Risk

Question 5

Why do some practitioners prefer the use of HS?

Historical simulation

Answer 5

They do not make assumptions (non-parametric), therefore they can sometimes capture extreme loss events better.

Question 6

How can HS better capture recent events?

Answer 6

Time-weighting

The most recent events weight higher than later events.

Question 7

Which is the most flexible of the VaR methods?

Answer 7

Monte Carlo Simulation

More parameters can be synthesised, different scenarios can be analysed.

Question 8

Which method could become expensive due to computational power required?

Answer 8

Monte Carlo Simulation

Millions or billions of simulations could be run.

Question 9

Which VaR method can be calculated by ranking returns?

Highest to lowest

Answer 9

Historical Simulation Method

Confidence intervals correspond to the nth lowest return.

Question 10

Using excel

How to annualise daily returns and Volatility?

standard dev. = stdev.s(returns)

period returns =product(1+returns)-1

Answer 10

Returns p.a. = (1+avg. daily)^252-1

Vol. p.a = daily vol.*sqrt(252)