IIQE Paper 5 Investments question: bank reports

Answer: D. there is a 95% chance that the largest daily loss likely to occur is HK$2 million

Answer: there is a 95% chance that the largest daily loss likely to occur is HK$2 million. A VaR statement gives the maximum loss likely within a period at a stated confidence level; here, a 95% chance that one day's loss will not exceed HK$2 million.Why not the others:• the position will lose HK$2 million on 95% of trading days: VaR is a ceiling on likely loss at a confidence level, not a forecast that the loss will happen most days.• HK$2 million is the largest loss that could ever occur in one day: VaR does not rule out larger losses; that gap is why stress tests are used.• there is a 5% chance of the position gaining HK$2 million in a day: VaR describes possible losses, not gains.Watch out: Reading VaR as the worst possible loss; larger losses can still happen outside the confidence level.Rule: VaR measures the change in value from market moves at a given confidence level, e.g. the maximum likely daily loss at 95% or 99%.Source: IA Investment-linked Long Term Insurance Examination Study Notes, 2024 Edition (7th ed., Nov 2024; for exams from 17 Feb 2025), 2.1.5(b), p. 2/7