Explanation:
The correct answer is B.
The Value at Risk (VaR) is a statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over a specific time frame. In this case, the initial surplus is $100,000 - $90,000 = $10,000.
The surplus VaR is calculated as 220% of the initial surplus: $10,000 × 220% = $22,000. Thus, Statement III is correct.
The expected surplus after one year is: $10,000 × (1 + 50%) = $15,000.
To find the worst-case scenario at the 99% confidence level, we subtract the surplus VaR from the expected surplus: $15,000 - $22,000 = -$7,000. This indicates a deficit of $7,000.
Therefore, there is a 1% probability that over the next year, the surplus will turn into a deficit of $7,000 or more. Thus, Statement II is also correct.
Ultimate access to all questions.
Q.2492 A pension fund has $100,000 in assets and $90,000 in liabilities. Assume that the expected return on the surplus is 50%, and the annual VaR of the surplus is 220% at the 99% confidence level.
Which of these statements is (are) accurate?
I. There is a 99% probability that, over the next year, the surplus will turn into a deficit of $7,000 or more
II. There is a 1% probability that, over the next year, the surplus will turn into a deficit of $7,000 or more
III. The surplus VaR is equal to $22,000
IV. The surplus VaR is equal to $5,000
A
Only I
B
Both II and III
C
Both II and IV
D
Both I and IV
No comments yet.