Question

QUESTION 4 1 points Save Answer Tina Ming is a senior portfolio Manager at Flusk Pension Fund (Flusk). Flusk's portfoliois composed of fixed Income Instruments structured to match Flusk's liabilities. Mingworks with Shrikant Mckee, Flusk's risk analyst.Ming and McKee discuss the latest risk report. McKee calculated value at risk (VaR for the entire portfolio using the historical method and assuming a lookback period offive years and 250 trading days per year. McKee presents VaR measures in Exhibit 1. Exhibit 1: Flusk Portfolio VaR (in $ millions) Confidence VaR Monthly VaR Interval Daily 1.10 95% 5.37 After reading McKee's report, Ming asks why the number of daily VaR breachesover the last year is zero even though the portfolio has accumulated a substantial loss.Next Ming requests that McKee perform the following two risk analyses on Flusk'sportfolio:Analysis 1 Use scenario analysis to evaluate the impact on risk and return of arepeat of the last financial crisis.Analysis 2 Estimate over one year, with a 95% level of confidence, how muchFlusk's assets could underperform its liabilities. Ming recommends purchasing newly issued emerging market corporate bondsthat have embedded options. Prior to buying the bonds, Ming wants McKee to estimatethe effect of the purchase on Flusk's VaR. McKee suggests running a stress testusing a historical period specific to emerging markets that encompassed an extremechange in credit spreads. At the conclusion of their conversation, Ming asks the following question aboutrisk management tools: "What are the advantages of VaR compared with other riskmeasures?" The limitation of the approach requested for Analysis 1 is that it omits asset correlations. precludes incorporating portfolio manager actions. O assumes no deviation from historical market events.

Answer 1

Merits Of VaR Compared to Other Risk Measures :

1. Easy To Understand:

VaR is just one value that gives an idea about magnitude of risk in the portfolio. It is easy to interpret and analyse since it is either measured in price units or percentage of portfolio.

2. Easy To Compare

One can measure and compare VaR of different protfolios and various assets. This helps in decison- making.

3. Availability

One can easily find VaR as a part of various financial softwares like bloomberg. This is the biggest advantage.

Limitation of Approach requested in Analysis 1 :-

precludes incorporating portfolio manager actions.