The mean return on the AUD/USD is 0.314%, with a standard deviation of 1.867%. Calculate the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 1%.

Question

Quizplus · Accepted Answer

Using the parametric (or variance-covariance) approach to calculate the Value-at-Risk (VaR), we apply the formula: VaR = Z * σ * Position Size, where Z is the Z-score corresponding to the confidence level (for 1%, Z = 2.33), σ is the standard deviation, and Position Size is the size of the position in question. Given a mean return of 0.314% and a standard deviation of 1.867% for the AUD/USD, for an AUD1m position, the one-day VaR at 1% probability is calculated as follows: VaR = 2.33 * 1.867% * AUD1m = 2.33 * 0.01867 * AUD1m ≈ AUD0.04361m or AUD43,610. Therefore, the closest answer is B) AUD40.361m.

The Mean Return on the AUD/USD Is 0