Answer: Thus, VaR will increase by (9.089 - 2.055) million, or USD 7.034 million. Thus, C is correct.

The question presented in the file content is a practice exam question from the Financial Risk Manager (FRM) certification, specifically focusing on Value-at-Risk (VaR) calculations. VaR is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. The question involves a series of calculations to determine the change in VaR after a portfolio is rebalanced. Here's the breakdown of the calculations: 1. **1-day 95% VaR of the rebalanced portfolio**: The formula given in the file content calculates the 1-day 95% VaR for a rebalanced portfolio. The result is USD 2.0327 million. 2. **Conversion to 10-day 95% VaR**: The 1-day VaR is then converted to a 10-day VaR by multiplying it by the square root of the number of days (10 in this case), which is a standard approach in risk management to scale VaR over different time horizons. The result is USD 6.4279 million. 3. **Conversion to 10-day 99% VaR**: Finally, the 10-day 95% VaR is converted to a 10-day 99% VaR by multiplying it by a factor that adjusts for the higher confidence level. The factor used here is the ratio of the 99% VaR confidence level to the 95% VaR confidence level (2.326/1.645). The result is USD 9.0889 million. The question then asks to compare the original 1-day 95% VaR (which is stated as USD 2.055 million, a slight discrepancy from the calculated value) to the new rebalanced 10-day 99% VaR (USD 9.089 million). The increase in VaR is calculated as the difference between these two values, which is USD 7.034 million. The answer choices provided in the question are evaluated as follows: - **Option A** is incorrect because it refers to the difference between the 10-day 95% VaR for the rebalanced portfolio and the 1-day 95% VaR for the original portfolio, which is USD 4.373 million. - **Option B** is incorrect as it states the 10-day 95% VaR for the rebalanced portfolio, which is USD 6.428 million. - **Option C** is correct because it refers to the increase in VaR, which is USD 7.034 million. - **Option D** is incorrect as it states the 10-day 99% VaR for the rebalanced portfolio, which is USD 9.089 million. The learning objective of this question is to understand and differentiate between various types of VaR measures, such as individual VaR, incremental VaR, marginal VaR, component VaR, undiversified portfolio VaR, and diversified portfolio VaR. The reference provided is Philippe Jorion's "Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition," specifically Chapter 7 on portfolio risk and analytical methods. In summary, the question tests the understanding of VaR calculations and the ability to compare different VaR measures under varying conditions. The correct answer is determined by accurately performing the calculations and understanding the implications of rebalancing a portfolio on its risk profile.