The divergence is larger for derivative exposures. This statement is accurate as per the findings of Bakshi and Panayotov (2010). They discovered that when intra-horizon risk is taken into account, it results in risk measures that are consistently higher than the standard VaR. This divergence is particularly larger for derivative exposures. Derivatives are financial instruments whose value is derived from the value of another asset, known as the underlying asset. These can include assets like stocks, bonds, commodities, currencies, interest rates, and market indexes. Derivatives are generally used for hedging risk, to ensure against price movements in the underlying asset. However, they can also be used for speculative purposes. Given the nature of derivatives and their inherent risk, it is understandable that the divergence in risk measures when considering intra-horizon risk would be larger for derivative exposures.

Choice B is incorrect. The minimum cumulative loss does not exert a distinct effect on the capital of a financial institution in the context of intra-horizon VaR. Rather, it is the maximum potential loss that could occur over a specified time period that has a significant impact on the capital of an institution.

Choice C is incorrect. The divergence is not smaller for derivative exposures when considering intra-horizon VaR. In fact, due to their complex nature and sensitivity to market conditions, derivative exposures often result in larger divergences compared to other types of financial instruments.

Choice D is incorrect. Intra-horizon VaR does not primarily rely on low-frequency P&L information. Instead, it combines VaR over the regulatory horizon with high-frequency P&L fluctuations over short-term periods to provide more accurate risk measures.

Things to Remember

• Intra-horizon VaR is a measure of risk that takes into account the potential for losses