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Negative VAR

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Negative VAR

  • This topic has 3 replies, 2 voices, and was last updated 4 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • February 17, 2022 at 5:56 am #648750
    julianleong
    • Topics: 7
    • Replies: 12
    • ☆

    Hi John,

    What does negative VAR imply? Will this happen in the exam?

    February 17, 2022 at 6:12 am #648757
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49601
    • ☆☆☆☆☆

    The VAR cannot be negative (either in the exam or in real life).

    February 17, 2022 at 8:37 am #648770
    julianleong
    • Topics: 7
    • Replies: 12
    • ☆

    Hi John,

    Sorry, I need to rephrase. VAR is positive but it is higher than the average.

    It was in an example in the BPP textbook whereby NPV for 4 years is $2mil and standard deviation for 1 year is $1mil.

    At 95% confidence level for the 4 years, it is 1.645 * $1mil * square root of 4 = $3.29m.

    Using $2mil to deduct $3.29m, I get -$1.29m. Does this mean that I am 95% confident that the return will be a loss of $1.29m and there is less than 5% chance that the loss will be greater than $1.29m?

    February 17, 2022 at 2:19 pm #648802
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49601
    • ☆☆☆☆☆

    It seems that the BPP textbook is a bit confused if you have cop[ied from there correctly.

    We use VaR on the annual net flow, not on the NPV.
    So if there were a return of $2m per year for 4 years, then the total average return would be $8M.

    There is a 5% chance therefore of the total return being less than 8 – 3.29 = $4.71M.

    Have you watched my free lectures on VaR?

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