Financial Risk Manager Part 1
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A risk manager is evaluating the impact of using the delta-normal model in calculating VaR for the following two positions:
A long position in a 6-month call option on 10,000 barrels of West Texas Intermediate crude oil (WTI) with a strike price of USD 85 per barrel
A long position in futures contracts to purchase 10,000 barrels of WTI in 6 months at a price of USD 85 per barrel
The current spot price of WTI is USD 84.50 per barrel. In assessing the 1-day 95% VaR of the two positions, which of the following is correct?
A
The VaR of the futures position is equal to the VaR of the call option position.
B
It would be inappropriate to assume that the expected value of the daily change in the WTI spot price is zero.
C
As the spot price of WTI decreases, the VaR of the call option will decrease in a linear fashion.
D
The delta-normal model assumes that the 1-day change in the value of the call option is normally distributed.