VaR Confidence level to get non-zero VaR

[emilioalzamora1]

Dear All, Dear David,

I have a bit of a tricky question at hand from the CAIA QuestionBank which I would like to share with all of you and which I am not quite sure about.

Malika Kone wants to compute the value-at-risk (VaR) measure on an asset with a 1/90 chance of losing $1,000,000 and an 89/90 chance of winning $20,000. Which of the following is the minimum confidence level required to compute a non-zero VaR?

Solution: To ensure the VaR will be non-zero, the required level of confidence is: (1 – 1/90) = 98.9%.


What is the intuition behind this question? Why do I wanna know the non-zero VaR? David, can you please shine some light on this one and how they get to the confidence level of 98.9%?

Thank you!

 

[Deepak Chitnis]

Hi @emilioalzamora1, as you know var is the worst expected loss. As question stated there is 1/90 chance of lossing 1000000 that clear means that var is non zero because there is some loss chance. Confidence level is estimated as 100%*(1-p), chances/probability is given as 1/90. Hope that helps!
Thank you!