The question in the provided content is a practice exam question for the Financial Risk Manager (FRM) certification, specifically focusing on the concept of Value-at-Risk (VaR). 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 period. The question involves calculating and comparing different VaR measures for a rebalanced portfolio.

The solution process in the content is as follows:

1. Calculation of 1-day 95% VaR for the rebalanced portfolio: The formula used here is a standard one for calculating VaR, which involves summing up the individual VaR contributions of each asset in the portfolio and then adding the product of the sum of the individual VaRs and the square root of the number of days in the period (in this case, 1 day). The result is USD 2.0327 million.

2. Conversion of 1-day 95% VaR to 10-day 95% VaR: This is done by multiplying the 1-day VaR by the square root of the number of days in the new period (10 days). The square root of 10 is approximately 3.1623, and when multiplied by the 1-day VaR, it gives a 10-day VaR of USD 6.4279 million.

3. Conversion of 10-day 95% VaR to 10-day 99% VaR: This step involves adjusting the 10-day 95% VaR to account for a higher confidence level (99% instead of 95%). The conversion factor is determined by the ratio of the z-scores for the two confidence levels. The z-score for a 95% confidence level is 1.645, and for a 99% confidence level, it is 2.326. The result is USD 9.0889 million.

The question asks to compare the original 1-day 95% VaR (USD 2.055 million) to the new rebalanced 10-day 99% VaR (USD 9.089 million). The increase in VaR is calculated by subtracting the original 1-day VaR from the new 10-day 99% VaR, which equals USD 7.034 million.

The incorrect options provided in the question are explained 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 not what the question asks for.
• Option B is incorrect because it simply states the 10-day 95% VaR for the rebalanced portfolio, which is not the figure being compared.
• Option D is incorrect because it states the 10-day 99% VaR for the rebalanced portfolio, which is the figure we are comparing to, but the question asks for the increase in VaR, not the figure itself.

The correct answer is C, which correctly identifies the increase in VaR as USD 7.034 million. The explanation is based on the calculations and comparisons provided in the content.