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Answer: For a futures contract, multiply the VaR of the S&P 500 Index by a sensitivity factor reflecting the percent change in the value of the futures contract for a 1% change in the index value.
## Explanation For **linear derivatives** like futures contracts, the VaR calculation involves: - **Multiplying** the VaR of the underlying asset (S&P 500 Index) by a **sensitivity factor** - This sensitivity factor represents the **percent change** in the derivative's value for a **1% change** in the underlying index value **Key Points:** - **Futures contracts are linear derivatives** - their value changes linearly with the underlying asset - **Options are non-linear derivatives** - they require different approaches (delta-gamma methods) - The sensitivity factor for futures is typically close to 1 since futures prices closely track the underlying index - Option B is incorrect because it applies the linear method to options, which are non-linear - Options C and D use division instead of multiplication, which is incorrect **Correct Answer: A** - This accurately describes the delta-normal approach for linear derivatives.
Author: LeetQuiz Editorial Team
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An analyst at Bergman International Bank has been asked to explain the calculation of VaR for linear derivatives to the newly hired junior analysts. Which of the following statements best describes the calculation of VaR for a linear derivative on the S&P 500 Index?
A
For a futures contract, multiply the VaR of the S&P 500 Index by a sensitivity factor reflecting the percent change in the value of the futures contract for a 1% change in the index value.
B
For an options contract, multiply the VaR of the S&P 500 Index by a sensitivity factor reflecting the percent change in the value of the futures contract for a 1% change in the index value.
C
For a futures contract, divide the VaR of the S&P 500 Index by a sensitivity factor reflecting the absolute change in the value of the futures contract per absolute change in the index value.
D
For an options contract, divide the VaR of the S&P 500 Index by a sensitivity factor reflecting the percent change in the value of the futures contract for a 1% change in the index value.
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