Baran

 

2、When would a Monte Carlo simulation be preferable to a historical simulation?

A) Historical data does not produce favorable results.

B) There is only a small amount of historical data.

C) Insufficient computer capacity.

D) A large amount of historical data is available.

Baran

 

The correct answer is A

 

The delta-normal method is analytical, because it describes VAR with a closed-form solution.

Baran

 

2、In a historical simulation method, the correlation among assets is:

A) embedded in the asset price changes.

B) ignored.

C) scaled by the gamma factor.

D) fixed at the current correlations.

Baran

 

The correct answer is A

 

In a historical simulation method, the correlation among assets is embedded in the asset price changes. One criticism of this method is that the correlations among assets are specific for the historical time period in which the prices were gathered and may vary for other periods.

Baran

 

The correct answer is C

Local-valuation methods are a first approximation to changes in overall portfolio value given changes in linear-related risk factors. The greater the nonlinear sensitivity of the portfolio (incurred by option-like exposures), or the more complex the sensitivity to risk factors, the less appropriate the application of the local-valuation method becomes.

Baran

 

AIM 3: List the advantages and disadvantages of using the delta-normal model, the historical simulation method, and the Monte Carlo simulation method for VAR calculations.

1、The delta-normal method is:

A) analytical. 

B) stochastic.

C) nonlinear.

D) called a Greek method.