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VAR

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

  • This topic has 9 replies, 3 voices, and was last updated 7 years ago by John Moffat.
Viewing 10 posts - 1 through 10 (of 10 total)
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  • May 6, 2014 at 7:32 pm #167687
    hasanali95
    Member
    • Topics: 239
    • Replies: 248
    • ☆☆☆

    When it says calculate the 95% 30 day Value at Risk.
    How can i find from the normal distribution table the value 1.65?
    And for n in the formula,do we use no.of days or yrs?

    May 7, 2014 at 10:22 am #167743
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    The value at risk is the average minus (z x standard deviation), where z is the number of standard deviations from the normal distribution table.

    For a level of 95%, 50% will be above the average and 50% below. To have a ‘cut-off’ of 95%, then it means 50% above and 45% below. So we need a limit for the remaining 5%.

    So….you look in the tables for how many standard deviations give an answer of 5% (or 0.05). If you look, you will see that in fact it is somewhere between 1.64 and 1.65 std deviations. (It is difficult to explain in words – if you download the revision notes on here, then towards the end of them you will find a page on VaR where I have drawn a picture which should make sense of it)

    There is no formula for VaR (other that what I typed in the first line), and certainly no ‘n’ in it. I can only think that you are talking about the period for the standard deviation, but this depends on what period the question is asking for.

    May 7, 2014 at 11:06 am #167750
    hasanali95
    Member
    • Topics: 239
    • Replies: 248
    • ☆☆☆

    For VAR we first calculate. sd * square root of n

    ie the time period,do we take this time period in yrs or days?

    May 7, 2014 at 11:31 am #167753
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    That is not a VaR formula – it is the formula for converting the std devn for one time period to the std devn for another time period. (You may need to do this for VaR but only if the time period required is different than the time period given).

    n is not days or years!

    If you are converting a 6 month SD to a yearly SD you multiply by sq root of 2 (because there are 2 6-month periods in a year).

    If you are converting a 1 month SD to a yearly SD you multiply by sq root of 12 (because there are 12 1-month periods in a year)

    If you are converting a 2 month SD to a 6 month SD you multiply by sq root of 3 (because there are 3 2-month periods in 6 months)

    And so on…. 🙂

    May 9, 2014 at 7:11 pm #168133
    hasanali95
    Member
    • Topics: 239
    • Replies: 248
    • ☆☆☆

    Sir in the ot notes
    I went to the standard normal distribution table
    At 1.64 the value is 0.4495
    And at 1.65 it is 0.4505

    So how can i say its the value for a 5% level?
    Cz in the table the highest value is 0.4990 at 3.09

    Pls help
    Thanks alot

    May 9, 2014 at 7:14 pm #168134
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    Sorry – I wrote it wrongly.

    Because the cut-off is 5%, you are looking for 45% below the average. (Overall 50% is below the average, but with 5% cut-off that leaves 45%)

    So you are looking for an answer of 0.45.

    December 3, 2017 at 8:33 am #419899
    balleong
    Participant
    • Topics: 4
    • Replies: 68
    • ☆☆

    Hello Tutor,

    @johnmoffat said:

    If you are converting a 6 month SD to a yearly SD you multiply by sq root of 2

    If you are converting a 1 month SD to a yearly SD you multiply by sq root of 12

    I’m not clear on the above. Say for SD of 1.645:

    – converting a 6 month SD to a yearly SD = 1.645^(1/2) = 1.283 ?
    – converting a 1 month SD to a yearly SD = 1.645^(1/12) = 1.042 ?

    Thank you.

    December 3, 2017 at 6:42 pm #419995
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    It is exactly as I wrote before, which is not what you have then written!

    To convert a six-month SD to a yearly SD:

    1.645 x (sq root of 2) = 2.326

    Converting 1 month to yearly:

    1.645 x (sq root of 12) = 5.698

    December 5, 2017 at 12:39 am #420479
    balleong
    Participant
    • Topics: 4
    • Replies: 68
    • ☆☆

    OIC, thanks for the clarification.

    December 5, 2017 at 7:52 am #420559
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    You are welcome 🙂

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  • The topic ‘VAR’ is closed to new replies.

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