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 2.5%.

Question

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The correct answer is A because the one-day value-at-risk of an AUD1m position on the USD, using the parametric approach subject to a probability of 2.5%, is AUD3.656m. This is calculated as follows:VaR = (z * σ) * Xwhere:z is the z-score corresponding to the desired probability (in this case, 2.5%)σ is the standard deviation of the returnX is the position sizeIn this case, we have:z = -1.96 (from the standard normal distribution table)σ = 1.867%X = AUD1mTherefore, VaR = (-1.96 * 1.867%) * AUD1m = AUD3.656m

The Mean Return on the AUD/USD Is 0