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FRM Practice Test & Exam Prep
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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
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Correct Answer:
The delta-normal approach does not account for gamma (convexity) effects
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