# *Spoiler* VAR Question

Given a daily 5% VAR of $5 million, which of these statements is correct and why?

“VAR is a measure of maximum loss, which in this case means we are 95% confident that the maximum 1-day loss is $5 million.”

“VAR is a measure that combines probabilities over a certain time horizon with dollar amounts, which in this case means that one expects to lose a minimum $5 million five trading days out of every 100.”

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The second one

5/100 is 5%

Var is a measure over a period of time - agree

in dollar amounts - agree

Arghh! Why can’t I put down a good reason to support my choice. I am just repeating the Qn

VAR combines probabilities ( ie. confidence intervals) with dollar amounts (IE value at risk)

Second is correct

5% VAR means a 90% confidence interval , but because we are interested only on the down side of the confidence interval we can state that probability as being 5 days out of 100.

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That’s what I said too. Maybe Schweser is wrong.

This is from the sample exam afternoon session. Explanation given is this:

“Both are correct.

VAR can be considered a minimum loss expected over a time horizon at a given probability. In this particular case, one would expect to exceed the VAR 5% of the time. Watch the wordings in VAR questions.

VAR is a measure that combines probabilities over a certain time horizaon with dollar amounts, which in the statement means that one expects to lose at least $5 million in five trading days out of 100.”

I’m not getting anything out of the explanation. Anyone care to take a crack at it?

VAR is the minimum loss ( alternately maximum loss) for a given probability and time period–So first one is correct also

2nd is definitely correct

how are minimum loss and maximum loss interchangeable??

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Good I feel better now.

they are both right.

1. 5% prob of minimum loss is $x, 95% sure that maximum loss is $x

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wvhome Wrote:

——————————————————-

> how are minimum loss and maximum loss

> interchangeable??

Exactly. How?

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KRochelli Wrote:

——————————————————-

> 1. 5% prob of minimum loss is $x,

I think I am starting to get it.

So we are sure that 95% of the time that the maximum loss is $5 million. 5% of the time the loss will exceed that. We don’t know what the maximum loss will be during that 5% of the time.

Quite confusing.

no, i don’t read it that way…………… yes, it’s the 95th percentile, but that is not the same as saying i’m 95% confident

if i got 95% percentile on GMAT (say i got 700), i wouldn’t say “i’m 95% confident that the maximum score is 700”

very bad wording IMHO

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GMAT is different. That is a set score and you fall in a certain percentile. There is no confidence interval or loss, etc.

In case 1, VAR tells us the probability of maximum loss. 95% of the time we will NOT LOSE MORE than $5 million.

It can also tell us the probability of minimum loss. In case 2, 5% of the time we will lose AT LEAST $5 million.

Now that I understand it I think it was a solid question.