Exercise Solution 8.7

Because we are using a 1-day VaR horizon, time 1 corresponds to November 8. The subscript i represents the number of basis days from time 1 to the maturity of the cash flow, which is November 15. Accordingly, the subscript i equals 7.

The fact that we are using 2nd-day valuation has no relevance for the value of the subscript i, which equals 7 regardless of the valuation method. Of course, the valuation method will affect the value of the discount factor 1Q7.

 

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