FRM Part II Practice Questions - Financial Risk Manager Part II Exam

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A bank uses a delta-normal VaR model to estimate the risk of an option portfolio. During a market crash, the VaR estimate significantly underestimated actual losses. What is the most likely cause of this underestimation?

The portfolio was perfectly hedged The delta-normal approach does not account for gamma (convexity) effects The confidence level was set too high The time horizon was too short

Correct Answer:

The delta-normal approach does not account for gamma (convexity) effects

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