Explanation:
Every VaR calculation should have a monetary amount, a time horizon, and a statistical component. The specific VaR calculation indicated in this question represents a monetary unit (5 million euros), a time horizon (daily), and a level of statistical component (5% significance or 95% confidence), which translates into a minimum amount of every 5 out of 100 days or a maximum amount of 95 out of 100 days.
(Book 1, Module 1.1, LO 1.b)
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Question 2
A junior analyst is trying to formulate a description of a VaR calculation to be included on the firm's recently updated web page. The specific VaR value is 5 million euros, which was calculated at the daily frequency, and the statistical confidence level associated with the calculation is 95%. The analyst recognizes that every VaR calculation should contain three elements when conveyed. Which of the following appropriately captures the requisite VaR information and should be used on the firm's web page?
A
This VaR calculation indicates that for every 5 out of 100 trading days, you should expect to lose no more than 5 million euros.
B
This VaR calculation indicates that for every 5 out of 100 trading days, you should expect to lose at least 5 million euros.
C
This VaR calculation indicates that for every 95 out of 100 trading days, you should expect to lose at least 5 million euros.
D
This VaR calculation indicates that for every 95 out of 100 trading days, you should expect to lose no more than 4.75 million euros.
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