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,

  • 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 '16 at 16:37
  • $\begingroup$ @Kiwiakos. Indeed. My lecturer confirmed there was a typo. Thank you looking through! $\endgroup$ – Gustavo Louis G. Montańo May 18 '16 at 9:37

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.

  • $\begingroup$ Absolutely. My lecturer confirmed there was a typo in the question. Thank you for looking through. $\endgroup$ – Gustavo Louis G. Montańo May 18 '16 at 9:38

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