 # *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.”

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.

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??

Good I feel better now.

they are both right. 1. 5% prob of minimum loss is \$x, 95% sure that maximum loss is \$x

wvhome Wrote: ------------------------------------------------------- > how are minimum loss and maximum loss > interchangeable?? Exactly. How?

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

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.