Question

The VaR will NOT provide a warning for A loss likely to be incurred by the...

The VaR will NOT provide a warning for

A loss likely to be incurred by the portfolio due to market risk

All of the answers are correct

A mismatch in the timing of cash inflows and outflows

Overall riskiness of a bank’s asset pool due to changes in the level of exposure

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Answer #1

All of the options are correct.

VaR stands for Value at risk. It is the maximum loss that is likely to be incurred by your portfolio with a given confidence interval for a given period of time under normal business conditions. It does not take into account the extreme market abnormalities or a sudden shift in the exposure. Also, the estimate is based on a given confidence interval and hence, may be breached several times due to market changes. VaR needs to calculated for different portfolios and may not reflect the riskiness of the overall portfolio due to the correlations between them.

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