COMPUTING VAR ON A PORTFOLIO CONTAINING A VERY LARGE NUMBER OF POS...

2015 FRM PRACTICE EXAM

13.

Computing VaR on a portfolio containing a very large number of positions can be simplified by mapping

these positions to a smaller number of elementary risk factors. Which of the following mappings would be

adequate?

USD/EUR forward contracts are mapped on the USD/JPY spot exchange rate.

Each position in a corporate bond portfolio is mapped on the bond with the closest maturity among a

set of government bonds.

Government bonds paying regular coupons are mapped on zero-coupon government bonds.

A position in the stock market index is mapped on a position in a stock within that index.

Correct Answer: c

Rationale:

Mapping government bonds paying regular coupons onto zero coupon government bonds is an ade-

quate process, because both categories of bonds are government issued and therefore have a very similar sensitivi-

ty to risk factors. However, this is not a perfect mapping since the sensitivity of both classes of bonds to specific

risk factors (i.e. changes in interest rates) may differ.

Section: Market Risk Measurement and Management

Reference:

Philippe Jorion, Value-at-Risk: The New Benchmark for Managing Financial Risk, 3rd Edition, Chapter 11,

“VaR Mapping.”

Learning Objective:

Explain the principles underlying VaR mapping, and describe the mapping process.

in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.

2015 Financial Risk Manager (FRM®) Practice Exam