hard · FRM Part 1
An analyst uses a 99% daily Value-at-Risk (VaR) model based solely on Delta. A portfolio has Δ = $1,000,000 and Γ = -$500,000 (both expressed as dollar-sensitivities for a 1% move).
If the 1-day 99% change in the underlying is 2.33%, how does the inclusion of Gamma affect the estimated VaR?
- The VaR remains unchanged because VaR is a first-order measure that traditionally ignores non-linear effects.
- The VaR increases because negative Gamma accelerates losses as the underlying price moves unfavorably.
- The VaR increases because the squared term (2.33%)^2 is added directly to the Delta-based loss.
- The VaR decreases because Gamma provides a 'cushion' against large directional moves through its squared term.
Sign up free to see the explanation and track your rank →
More FRM Part 1 practice
- According to the CAPM, which type of risk are investors compensated for bearing?
- What specific variety of liquidity risk is being described?
- How is 'Risk Capacity' distinguished from 'Risk Appetite' in a standard risk governance fr
- If a loan has a Probability of Default (PD) of 2.0%, an Exposure at Default (EAD) of $1,00
- If two portfolios have the same Sharpe ratio but one has positive skewness and the other h
- In a 'Liquidity Spiral', what is the primary channel by which market liquidity risk and fu
- In the context of the CAPM, what is the definition of 'Alpha' (α)?
- In the risk decomposition formula σ^2_i = β^2_i σ^2_M + σ^2_ε, what does σ^2_ε represent?