Discuss PRMIA 8010 Exam Topic 8 Question 60

Which of the following statements are true in relation to Monte Carlo based VaR calculations:

1. Monte Carlo VaR relies upon a full revalution of the portfolio for each simulation

2. Monte Carlo VaR relies upon the delta or delta-gamma approximation for valuation

3. Monte Carlo VaR can capture a wide range of distributional assumptions for asset returns

4. Monte Carlo VaR is less compute intensive than Historical VaR

A1 and 3

B2 and 4

C1, 3 and 4

DAll of the above

Suggested Answer: A

Monte Carlo VaR computations generally include the following steps:

1. Generate multivariate normal random numbers, based upon the correlation matrix of the risk factors

2. Based upon these correlated random numbers, calculate the new level of the risk factor (eg, an index value, or interest rate)

3. Use the new level of the risk factor to revalue each of the underlying assets, and calculate the difference from the initial valuation of the portfolio. This is the portfolio P&L.

4. Use the portfolio P&L to estimate the desired percentile (eg, 99th percentile) to get and estimate of the VaR.

Monte Carlo based VaR calculations rely upon full portfolio revaluations, as opposed to delta/delta-gamma approximations. As a result, they are also computationally more intensive. Because they are not limited by the range of instruments and the properties they can cover, they can capture a wide range of distributional assumptions for asset returns. They also tend to provide more robust estimates for the tail, including portions of the tail that lie beyond the VaR cutoff.

Therefore I and III are true, and the other two are not.

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32 comments · newest first

Lanie 10 months ago

Surprised to see 4 as a claim, that doesn't sound right at all!

Chery 11 months ago

I thought it was all about the delta-gamma approximation, so 2 seems right.

Merlyn 11 months ago

Wait, isn't Monte Carlo more compute-intensive than Historical VaR?

Kaycee 11 months ago

Totally agree, 1 and 3 are spot on!

Merlyn 11 months ago

Monte Carlo VaR does require full revaluation for each simulation.

Teri 12 months ago

I practiced a question similar to this, and I think Monte Carlo is actually more compute-intensive than Historical VaR, which makes statement 4 questionable.

Zona 12 months ago

I definitely recall that Monte Carlo can handle different distributional assumptions, so statement 3 seems correct to me.

Floyd 12 months ago

I'm not entirely sure about statement 2; I thought Monte Carlo methods don't rely on delta-gamma approximations but rather simulate actual price paths.

Arletta 1 year ago

I remember that Monte Carlo VaR does require full revaluation for each simulation, so I think statement 1 is true.

Blythe 1 year ago

Hmm, I'm not sure about the compute intensity comparison. I'll have to think that through carefully.

Karl 1 year ago

The ability to capture different distributional assumptions is a key advantage of Monte Carlo VaR. I'll make sure I understand that well.

Cary 1 year ago

Monte Carlo VaR requires a full revaluation, right? I think that's the main difference from the delta or delta-gamma approximation used in other methods.

Tien 1 year ago

Okay, I'm pretty sure I know the differences between Monte Carlo and Historical VaR. Let me review the key points.

Ressie 1 year ago

This looks like a tricky one. I'll need to think through the details of Monte Carlo VaR to answer this properly.

Peggie 2 years ago

Haha, Abel, you might need to upgrade to a supercomputer for those Monte Carlo simulations! This question is really testing our understanding of the various VaR methodologies.

Darnell 2 years ago

↳ replying to Peggie

Yeah, that's right. It's important to understand the differences between Monte Carlo VaR and Historical VaR.

Jettie 2 years ago

↳ replying to Peggie

I think the correct answer is A) 1 and 3, because Monte Carlo VaR can capture different distributional assumptions for asset returns.

Ivette 2 years ago

↳ replying to Peggie

I know, Monte Carlo simulations can be quite computationally intensive!

Abel 2 years ago

Wait, does this mean I can't use my trusty calculator for the Monte Carlo VaR calculations? I was hoping to breeze through this question.

Janessa 2 years ago

Hmm, I'm not so sure. I thought Monte Carlo VaR was more computationally intensive than Historical VaR. Maybe I'm missing something here.

Yolande 2 years ago

I agree with Jenelle. The other statements about delta-gamma approximation and compute intensity are not true for Monte Carlo VaR.

Silvana 2 years ago

↳ replying to Yolande

So the answer is A) 1 and 3.

Dominga 2 years ago

↳ replying to Yolande

Yes, and it can capture a wide range of distributional assumptions for asset returns.

Victor 2 years ago

↳ replying to Yolande

I agree, Monte Carlo VaR does rely upon a full revaluation of the portfolio for each simulation.

Ashleigh 2 years ago

↳ replying to Yolande

I think the correct statements are 1 and 3.

Vicente 2 years ago

But Monte Carlo VaR can capture a wide range of distributional assumptions, so I think A) 1 and 3 is correct.

Jenelle 2 years ago

Option A is correct. Monte Carlo VaR does rely on a full revaluation of the portfolio for each simulation, and it can capture a wide range of distributional assumptions.

Dominga 2 years ago

↳ replying to Jenelle

So, the correct answer is A) 1 and 3.

Marnie 2 years ago

↳ replying to Jenelle

Yes, that's right. It also can capture a wide range of distributional assumptions for asset returns.

Lenna 2 years ago

↳ replying to Jenelle

I think option A is correct. Monte Carlo VaR relies on a full revaluation of the portfolio for each simulation.

Lisbeth 2 years ago

I disagree, I believe the answer is B) 2 and 4.

Vicente 2 years ago

I think the answer is A) 1 and 3.

PRMIA 8010 Exam - Topic 8 Question 60 Discussion