0
$\begingroup$

I am currently completing a multiple choice question that has stumped me.

An asset has its price and its corresponding probability described as: 100, 0, -50, -70 and -90 with probabilities 50%, 12%, 6.5%, 1% and 0.5% respectively. Calculate the absolute value at risk with a loss probability of 2%.

To begin, we have not been given the complete probability distribution of the price of the asset; the probabilities add up to 70%. Is it still possible to calculate the 98% VaR?

It doesn't make too much sense to me as we don't know what's happening at the loss tail of the distribution. For all we know a loss of -100,000,000 can occur with probability 30%.

There is a choice of "None of the answers is correct", which is what I am leaning for.

I am hoping for a better explanation.

Kind regards,

$\endgroup$
2
  • 2
    $\begingroup$ Are you sure that these are not the cumulative distribution points? Also VaR is for P&L rather than price, do you have the current price? $\endgroup$
    – Kiwiakos
    May 14, 2016 at 16:37
  • $\begingroup$ @Kiwiakos. Indeed. My lecturer confirmed there was a typo. Thank you looking through! $\endgroup$ May 18, 2016 at 9:37

1 Answer 1

1
$\begingroup$

The answer is undefined as the probability distribution provided is invalid, the probabilities don't sum up to one, so there's not much to expand on here.

$\endgroup$
1
  • $\begingroup$ Absolutely. My lecturer confirmed there was a typo in the question. Thank you for looking through. $\endgroup$ May 18, 2016 at 9:38

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.