Explanation:
The following formula is used to calculate the VaR for a linear derivative: VaRp = δVaRf.
The delta in the formula, δ, is a sensitivity factor that reflects the change in value of the derivatives contract for a given change in the value of the underlying. The delta adjustment to the VaR of the underlying asset accounts for the fact that the relative changes in value between the underlying and the derivatives may not be one for one but nevertheless are linear in nature. Note that options are non-linear.
(Book 4, Module 48.1, LO 48.d)
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Question 71
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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