Answer: USD 0.32

The delta-normal method is used to estimate the Value at Risk (VaR) for a non-linear derivative, such as an option. In this case, the analyst is estimating the 1-day 95% VaR for a long position in a put option on Big Pharma, Inc. stock. The stock is trading at USD 26.00 with a daily volatility of 1.5%, and the option is at-the-money with a delta of -0.5. The standard deviation of the option's price change, considering its delta, is calculated as follows: \[ \sigma_p = | \text{delta} | \times \sigma_s = | -0.5 | \times (0.015 \times 26) = 0.195 \] Where \( \sigma_s \) is the stock's standard deviation of its price change. Assuming the mean change in the risk factor is zero, the delta-normal VaR at the 95% confidence level is calculated using the standard normal distribution's 95th percentile value (1.645) and the option's standard deviation: \[ \text{VaR}_{\text{delta-normal}} = \sigma_p \times Z = 0.195 \times 1.645 = \text{USD 0.3208} \] This calculation results in a VaR of approximately USD 0.32, which corresponds to option A. The other options provided are incorrect as they represent different VaR values for different confidence levels or delta values. Therefore, the correct answer is A, USD 0.32.

Author: LeetQuiz Editorial Team