Answer: This model is underestimating risk

## Explanation At a 95% confidence interval, we expect VaR exceedances to occur approximately 5% of the time. Over 100 days, the expected number of exceedances would be: - Expected exceedances = 100 days × 5% = 5 days However, the actual number of exceedances observed was 9 days, which is significantly higher than the expected 5 days. ### Key Points: 1. **95% confidence interval** means we expect losses to exceed VaR only 5% of the time 2. **Expected exceedances in 100 days**: 100 × 0.05 = 5 days 3. **Actual exceedances observed**: 9 days 4. **Interpretation**: When actual exceedances exceed expected exceedances, the model is **underestimating risk** because it's not capturing the true risk level ### Why not the other options: - **A (overestimating risk)**: Would be true if actual exceedances were LESS than expected - **C (appropriate)**: Would be true if actual exceedances were close to expected (around 5) - **D (accurate)**: Same as C - model would be accurate if actual results matched expectations The model is clearly underestimating risk because it predicted only 5 exceedances but actually experienced 9, indicating the true risk is higher than what the model suggests.

Author: Nikitesh Somanthe