2014 #22

When determining the Var99% levels for each business unit, the solution says we add the sigma*critical value to the mean.



But the mean is profit (not loss), so why would we include expected profit as contributing to capital held? This doesn't make sense, shouldn't expected profits deduct form capital held. If say we had 100% certainty we'd make $10 in profit. According to this method, we'd hold $10 in capital, when we wouldn't need to?



Why wouldn't the VaR99% = mean profit - critical value * sigma ?

2014 #22

2014 #22

The question gives a normal distribution for annual profit. It then says to hold capital at the 99th percentile. Wouldn't everyone agree that we should hold at the left tail here and not the right? But the answer is calculating the right tail 99th percentile.



This question made me so enraged. Shows how little exposure the exam writers have to this material...

2014 #22