IBM reported VAR for 2008 is as follows in millions Interes

IBM reported VAR for 2008 is as follows in millions:
·         Interest rate              $45
·         Foreign Exchange     $122
·         Commodities             $60
What is the overall VAR assuming absence of cross correlation among various risk factors?

Question options:

1)

2)

3)

4)

Solution

CORRECT ANSWER : 2) 143.2

As there is no correltion between the variables, the formula for VaR for 3 assets=

VaR = SQRT(VaR₁² + VaR₂² + VaR₃²)

VaR = SQRT(45² + 122² + 60²) = SQRT (20509) = 143.2