First, calculate the original 1-day 95% VaR of the portfolio. The formula for the portfolio VaR of two assets is: $\text{VaR}_p = \sqrt{\text{VaR}_C^2 + \text{VaR}_E^2 + 2\rho(\text{VaR}_C)(\text{VaR}_E)}$ Original positions have $\text{VaR}_C = 2.5$ million and $\text{VaR}_E = 2.5$ million. $\text{VaR}_{\text{old}} = \sqrt{2.5^2 + 2.5^2 + 2(0.47)(2.5)(2.5)} = \sqrt{6.25 + 6.25 + 5.875} = \sqrt{18.375} \approx 4.2866 \text{ million}$

Second, perform the portfolio rebalancing. Selling CAD 20 million of Canadian equates and buying CAD 20 million of emerging market equities changes the position sizes:

• New Canadian position = 72 - 20 = 52 million
• New Emerging Market position = 58 + 20 = 78 million

Assuming the VaR scales linearly (since volatilities remain the same):

• $\text{New VaR}_C = 2.5 \times (52/72) = 1.8056$ million
• $\text{New VaR}_E = 2.5 \times (78/58) = 3.3621$ million

Calculate the new 1-day 95% VaR with these adjusted values: $\text{New 1-day 95\% VaR}_p = \sqrt{1.8056^2 + 3.3621^2 + 2(0.47)(1.8056)(3.3621)}$ $= \sqrt{3.2602 + 11.3037 + 5.7063} = \sqrt{20.2702} \approx 4.5022 \text{ million}$

Third, adjust the risk measure to a 10-day 99% VaR. The formula to scale VaR by holding period and confidence level is: $\text{VaR}_{T_2, CL_2} = \text{VaR}_{T_1, CL_1} \times \left(\frac{Z_{99\%}}{Z_{95\%}}\right) \times \sqrt{\frac{T_2}{T_1}}$ Using standard Normal multipliers $Z_{99\%} = 2.326$ and $Z_{95\%} = 1.645$: $\text{New 10-day 99\% VaR}_p = 4.5022 \times \left(\frac{2.326}{1.645}\right) \times \sqrt{10}$ $= 4.5022 \times 1.4140 \times 3.1623 = 20.131 \text{ million}$

Finally, calculate the change in VaR. $\text{Change in VaR} = \text{New 10-day 99\% VaR} - \text{Original 1-day 95\% VaR}$ $= 20.131 - 4.2866 = 15.8444 \text{ million}$

The VaR increases by approximately 15.844 million.