Value at Risk A firm uses historical simulation to calculate its Value at Risk (VaR), using daily horizons and a 99% confidence level. In its annual report, it discloses the limitations of the VaR but explains that the VaR involves fewer assumptions than parameter-based risk measures. The firm also applies stress testing in risk measurement and control. Use your library databases to research “parameter-based risk measures” and “stress testing.”

Required:

1. Under what condition(s) would historical simulation be more appropriate than parameter-based measures?

2. How many days in a year would the firm expect to incur losses greater than that predicted by VaR estimates?

3. Explain how stress testing may be carried out.