Past FRM question: Binary option VAR

[monsieuruzairo3]

Dear David Harper, CFA, FRM, CIPM ShaktiRathore

I am totally bamboozled by this past FRM question(FRM 2006). I know you said looking beyond 2009 paper was counterproductive but nonetheless was interested to know if it should be of concern for the Level 1

Imagine a portfolio which holds two binary options, each with the same payoff and probability: USD -100 with a probability of 4% and USD 0 with a 96% probability. Assuming the underlying has uncorrelated returns, what is the VaR (95% confidence level, 1 day)?
A.The VaR is zero
B.The VaR is USD 100
C.The VaR is USD 200
D.None of the above

Answer is B (no idea how )

Best
Uzi

 

[David Harper CFA FRM]

Hi monsieuruzairo3 that question goes way back but it's a good one i think, see http://forum.bionicturtle.com/threads/var-calculation-2003-frm-question.87/#post-348
i.e., might as well be two independent $100 face bonds each with PD of 4%

It's also good because it is a very straightforward illustration of a classic, key drawback/shortcoming of VaR ... a lack of something?.

 

[monsieuruzairo3]

cool

 

[Elnur1]

Dear David Harper CFA FRM ,CIPM if we calculated Var =-pq and the var 100 - 0.95*1.64 ?but there is showing that var is 100.It is DISTRICT for that we calculated it .

 

[David Harper CFA FRM]

Hi @Elnur1 I don't understand, sorry