8008 Exam Dumps : PRM Certification - Exam III: Risk Management Frameworks, Operational Risk, Credit Risk, Counterparty Risk, Market Risk, ALM, FTP - 2015 Edition

The exact formula for VaR is = -(Zα σ + μ), where Z α is the z-multiple for the desired confidence level, and μ is the mean return. Now Zα is always a negative number, or at least will certainly be provided the desired confidence level is greater than 50%, and μ is often assumed to be zero because generally for the short time periods for which market risk VaR is calculated, its value is very close to zero.

Therefore in practice the formula for VaR just becomes -Zασ, and since Z is always negative, we normally just multiply the Z factor without the negative sign with the standard deviation to get the VaR.

For this question, there are two ways to get the answer. If we use the formula, we know that -Zασ= 250,000 (as μ=0), and therefore -Zασ - μ = 250,000 - 10,000 = $240,000.

The other, easier way to think about this is that if the mean changes, then the distribution's shape stays exactly the same, and the entire distribution shifts to the right by $10,000 as the mean moves up by $10,000. Therefore the VaR cutoff, which was previously at -250,000 on the graph also moves up by 10k to -240,000, and therefore $240,000 is the correct answer.

The other choices are intended to confuse by multiplying the z-factor for the 99% confidence level with 10,000 etc.

When VaR is based on an assumption of normality with a static mean and volatility, it means anything that violates these assumptions will introduce model error. Volatility clustering implies a non-static volatility. Heavy tails imply non-normality of the shape of the distribution. Autocorrelation of squared returns implies that returns are not independent and identically distributed. Therefore all of these introduce model error. Choice 'd' is therefore the correct answer.

Choice 'b' is the correct answer. All other answers are incorrect.

Refer to the detailed loss event type classification under Basel II (see Annex 9 of the accord). You should know the exact names of all loss event types, and examples of each.