VAR- Level 1 Testable concepts

[notjusttp]

Hi David,

Can you kindly clarify if these r testable concepts in Level 1 as the distinction is quite hazy and there is a lot of coverage on VAR.

Calculating VaR of options
Var Impact of a small project
Delta normal Var/Stulz Var impact
VAR Mapping
Sub-Additive
Mapping Options
LVAR
Marginal VAR
VaR-delta (Marginal VaR) and time horizons
VaR of an Equity Portfolio
Incremental VaR using Beta Co-efficient
EVT distribution
VAR
Tracking error VAR
Diversified VAR on Learning spread sheet: 5.c.2 Jorion Mapping FI
Sheet 5-d-1 | Test for Var Subadditivity
Cash Flow at Risk

Can you kindly clarify as to what are the testable concepts for VAR for Level 1 only as i dont want to waste a lot of time on unnecessary higher level studies at the same time not losing on the assigmentes for Level 1 since the weightage for this section is 30% in Level 1.

Thanks & Rgds
Amit

 

[notjusttp]

Hi David,

Can you kindly Clarify on this.

rgds
Amit

 

[David Harper CFA FRM]

Hi Amit,

I organized your list into three groups (but you probably know my caveat: there is no track record in regard L1 vs L2; some the AIMs allow for some grey area/overlap potential. There are some fuzzy areas). Also, the learning XLS correspond to the topics, so 5.d.1 (for example) is generally a L2 concept (although it may help with a qualitative understanding of sub-additivity)

1. Yes, under the scope of Level 1
* Sub-Additive (qualitative concept only)
* delta normal VaR and time horizons and,
VaR of an Equity Portfolio
(so, yes, I would be definitely be prepared for basic VaR calculation for one asset or two-asset portfolio; e.g., given x% volatility, what is 95% confident VaR?)
e.g., question 20a is part of sample L1, you can almost expect to be asked this:
https://forum.bionicturtle.com/threads/question-20-stock-returns.3539/

...but note sample 9b asks for VaR of an interest rate swap:
https://forum.bionicturtle.com/threads/question-9-value-at-risk-var-of-interest-rate-swap.1113/

2. No, under the scope of Level 2
EVT distribution (probably only Level 2, although briefly mentioned in Rachev L1, so I am a little unsure....)
Var Impact of a small project
Delta normal Var/Stulz Var impact
VAR Mapping (L2 clearly)
Mapping Options (L2)
LVAR (L2 clearly)
Marginal VAR (L2)
Incremental VaR using Beta Co-efficient (L2)
Diversified VAR on Learning spread sheet: 5.c.2 Jorion Mapping FI
Sheet 5-d-1 | Test for Var Subadditivity (L2 as this is a deeper dive into ES)

3. Topics that are fuzzy (i.e., could have justification under L1)
Tracking error VAR
Cash Flow at Risk
Calculating VaR of options (unlikely)

hope that helps...David

 

[notjusttp]

Hi David,

This definitely helped me..Tks a ton..cheers..Amit

 

[RiskNoob]

VaR is one of the P1 topics that I would like to pay attention in upcoming focus review - VaR is somewhat introduced in T1 and T2, however Allen Linda's chapters (especially chapters in T4) seem to be criticized quite a bit (usage of delta etc).

I am wondering whether VaR basics mentioned above(in P1) can still be covered by skipping these chapters in T4? Skipping these chapters would definitely save time, but I would like to have a solid introduction to VaR - VaR is the one of basics and widely used tool for risk management/measurement.

RiskNoob

 

[David Harper CFA FRM]

Hi RiskNoob, I remind the above is a 2009 thread.
FR6&7 will heavily include VaR (in fact, we are collecting all VaR-related PQ from the 2010-2012 as the preliminary source). VaR is clearly the most important risk measure, so I agree it's important. The weakness is really just the Allen text, so P1 FRM is weakly assigned. Just compare the relative disconnect between actual T4 reading assignments and the long concept list which occupies over 1/3 of the concepts (i.e., Value-at-Risk (VaR): Applied to stock, currencies, and commodities; Applied to linear and non-linear derivatives; Applied to fixed income securities with embedded options; Structured Monte Carlo, stress testing, and scenario analysis; Extending VaR to operational risk; Limitations as a risk measure; Coherent risk measures). If those are the right concepts, then the Linda Allen (IMO) needs to be replaced and the concepts better supported.
In the meantime, better is 25. Dowd for VaR (and ES). Thanks,

 

[RiskNoob]

Yes, I did not notice about chapters from Ong and Dowd (these chapters do involve VaR) which were assigned in 'Capital allocation' and 'Credit Ratings' in FRM P1 reading plan by GARP. I will take a look at these chapters to grab the basic concepts of VaR.

Thanks

RiskNoob

 

[bhar]

1) Calculating VaR of Options - Using the taylor series approx. appeared in your practice questions. I was under the assumption that it is a likely testable concept.
2)As per your notes, it is clear that the delta gamma approximation vs the Full revaluation methods (eg. SMC etc) have also been clearly explained.
3) VaR of Linear and Non Linear Derivatives - is the title of the topic

Given this, I am assuming this is testable. You even mention - 'Classic FRM Question' in the notes.

Thanks

 

[David Harper CFA FRM]

Hi bhar,

Yes i agree those three concepts are testable, consistent with the AIMs.
(I remind that my original reply above was THREE years ago, immediately after the exam split, so i have not re-analyzed that reply in the context of 2012)
Thanks,

 

[Ryan S]

Hi David, can you provide an updated link to these? Current links lead to an error.

"1. Yes, under the scope of Level 1
* Sub-Additive (qualitative concept only)
* delta normal VaR and time horizons and,
VaR of an Equity Portfolio
(so, yes, I would be definitely be prepared for basic VaR calculation for one asset or two-asset portfolio; e.g., given x% volatility, what is 95% confident VaR?)
e.g., question 20a is part of sample L1, you can almost expect to be asked this:
http://forum.bionicturtle.com/viewthread/1218/

...but note sample 9b asks for VaR of an interest rate swap:
http://forum.bionicturtle.com/viewthread/1180/"

 

[David Harper CFA FRM]

Hi @Ryan S I located those links (they are old: before our upgrade to XenForo forum) and replaced them above:

• https://forum.bionicturtle.com/threads/question-20-stock-returns.3539/
• https://forum.bionicturtle.com/threads/question-9-value-at-risk-var-of-interest-rate-swap.1113/

I hope that's helpful!

 

[Ryan S]

Thank you v much David