Question

A bank's g sec portfolio has 100 day var at 95% confidence level of 4% based on yield. what is the worst case scenario over 25 days

Answer 1

Increase in yield by 0.4% b. Decrease in yield by 0.4% c. Increase in yield by 2% d. Decrease in yield by 2% Ans -c Solution : 100 day VaR is 4 %. So one day Var is, 4 = one day VaR × square root of 100 4= one day VaR × 10 One day VaR = 0.4 % 25 day VaR = 0.4 × suare root of 25 = 0.4 × 5 = 2% In worst case scenario yield will always increase. Because this will decrease the market price or value. Answer is increase in yield by 2 %