GARP Financial Risk and Regulation (FRR) Series 2016-FRR Question # 15 Topic 2 Discussion
2016-FRR Exam Topic 2 Question 15 Discussion:
Question #: 15
Topic #: 2
Bank G has a 1-year VaR of USD 20 million at 99% confidence level while bank H has a 1-year VaR of USD 10 million at the same confidence level. Which bank is in a more risky position as measured by VaR?
A.
Bank H is taking twice the risk of bank G as measured by VaR.
B.
Bank G is taking twice the risk of bank H as measured by VaR.
C.
Since the confidence levels are the same we cannot make any conclusions.
D.
Both banks are equally risky since the measurements are with the same confidence level.
Value at Risk (VaR) is a statistical measure used to assess the risk of loss on a specific portfolio of financial assets. In this case, Bank G has a 1-year VaR of USD 20 million at 99% confidence level, while Bank H has a 1-year VaR of USD 10 million at the same confidence level. The VaR figure indicates the maximum potential loss over a given period (1 year) at a certain confidence level (99%). Therefore, Bank G is taking twice the risk of Bank H as the VaR is double that of Bank H.
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