Operational risk cannot be measured by VaR systems in the context of the investment management industry. Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This includes legal risk, but excludes strategic and reputational risk. Operational risk is inherently difficult to quantify and model due to its complex and idiosyncratic nature. VaR systems, which are designed to measure and control market and credit risks, are not equipped to handle the unique characteristics of operational risk. Therefore, operational risk is typically managed through other means, such as internal controls, audits, and risk management frameworks.

Choice A is incorrect. Liquidity risk can be measured by VaR systems. This type of risk refers to the possibility that an investor may not be able to buy or sell assets quickly enough at a price close to their true underlying value due to lack of market liquidity. VaR systems can estimate this risk by simulating various market conditions and observing the impact on asset prices.

Choice B is incorrect. Market risk, which refers to the potential for losses in positions arising from movements in market prices, is one of the primary risks that VaR systems are designed to measure. They do this by simulating changes in various factors such as interest rates, exchange rates, equity prices and commodity prices.

Choice C is incorrect. Credit risk can also be measured by VaR systems. Credit risk refers to the potential loss resulting from a borrower's failure to meet its obligations as agreed upon in a contract. VaR models can estimate this type of risk using credit spreads and default probabilities.

Things to Remember

• VaR (Value at Risk) is a widely used risk management measure that quantifies the potential loss in value of a portfolio over a specified time horizon and at a given confidence level.
• Liquidity risk is the risk that an investor may not be able to buy or sell an asset quickly enough at a price close to its true underlying value.
• Market risk is the risk of losses in positions due to movements in market prices, such as interest rates, exchange rates, equity prices, and commodity prices.
• Credit risk is the risk of loss resulting from a borrower's failure to meet its obligations as agreed upon in a contract.