Lognormal VaR formula on FR_T5_pq_final video lesson

[Randy Moon]

What does this Pt-1 represent? It isn't used in the actual calculation below.

 

[David Harper CFA FRM]

Hi @Randy Moon In the lognormal formula P(t-1) is simply the price base and it can be included/excluded (like any VaR) depending on whether we seek the return (%) or the dollar ($) VaR. In the example, where μ = 10% and σ = 20%, we can say that the 95% lognormal VaR is given by 1 - exp(10% - 20% * 1.645) = 20.467% (as shown, although it should have a "%"). Alternatively, if yesterday's price was, P(t-1) = $100 then the 95% lognormal VaR can be given by $100.00 * [1 - exp(10% - 20% * 1.645)] = $20.4647. Sometimes yesterday's price, P(t-1), is also represented by wealth, W(0). Hope that's helpful,

 

[Randy Moon]

Excellent. Thank you.