medium · Frm Part 2 Market Risk
A bank maps a long call option on an equity index using only a linear (delta) approximation.
During a significant market sell-off, how will the measured VaR likely compare to the actual realized loss?
- The VaR will understate the risk due to the omission of vega.
- The VaR will overstate the risk for the long option position.
- The VaR will be exactly half of the actual loss.
- The VaR will accurately predict the loss because delta is the primary driver.
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