Financial Risk Manager Part 1

Explanation

At a 95% confidence interval, we expect VaR exceedances to occur only 5% of the time. Over 100 days, this translates to:

• Expected exceedances: 100 days × 5% = 5 exceedances
• Actual exceedances: 9 exceedances

Since the actual number of exceedances (9) is significantly higher than the expected number (5), this indicates that:

• The model is underestimating risk because losses exceeding the VaR threshold are occurring more frequently than predicted
• The VaR of $10 million is too low for the actual risk level
• The model is not accurately capturing the portfolio's true risk exposure

Key Insight: When actual exceedances exceed expected exceedances, the VaR model is underestimating risk, suggesting the need for model recalibration or a more conservative risk assessment approach.