Groundlearn / Glossary / Parametric VaR
Parametric VaR
Also called variance-covariance VaR, delta-normal VaR. A FRM term, defined in plain English with the distinction examiners test.
What it means
Estimating VaR from an assumed distribution, usually normal, using the portfolio’s volatility and correlations.
The exam angle
Fast and analytic, but wrong twice over for options books: returns are not normal, and a linear delta approximation ignores gamma.
Where it appears in the syllabus
- Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.
See it worked through
- Value at Risk: the square-root-of-time ruleScale a one-day VaR to ten days with a worked example, and see where the rule breaks.
There is also a short video: watch it on YouTube.
Related terms
- BacktestingComparing realised losses with the VaR forecasts that preceded them, to check that breaches occur about as often as…
- Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.
- Carry tradeBorrowing in a low interest rate currency to invest in a high interest rate one, profiting if the exchange rate does…
- Coherent risk measureA risk measure satisfying monotonicity, subadditivity, positive homogeneity and translation invariance.
- ConvexityThe curvature of the price–yield relationship — how duration itself changes as yields move.
- CorrelationCovariance divided by the product of the two standard deviations, giving a unit-free number between −1 and +1.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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