Question

Company A currently holds dollar-denominated bonds and is
expected to receive $ 1 billion in principal and interest in a year
and six months later. In order to objectively grasp the situation
exposed to foreign currency risk, we intend to apply the
variance-covariance method. The maturity of dollar-denominated
bonds traded on the market is 1 and 2 years, and the annual bond
yields are 5% and 6%, respectively. In addition, the annual
volatility of bonds was 0.5% and 0.7%, respectively, and the
correlation coefficient was determined to be 0.4.

① Calculate the present value of each when
mapping 1 billion to two bond periods.

② Assuming a normal distribution under the 99% confidence level, calculate the variance VaR and the non-variance VaR of the position.

Answer #1

ANSWER :

1. Amount expected to be received in 1 1/2 years =$ 1 Billion = 10000 Lakhs

2. Maturity periods of bonds = 1 and 2years

3. Annual bond yields are 5% and 6% respectively

4. Annual Volatility rate 0.5 % and 0.7% respectively

5. Correlation coefficient 0.4

Part 1. Calculation of the Present value

Present value = Future Value [1/((1+r)^n)]

a) Bond Period of 1 year

= 1 [1/((1+5)^1)]

= 0.167 BILLION

b) Bond Period of 2 years

= 1 [1/((1+6)^2)]

= 0.024 billion

Part 2 -

Variance = sigma square

99% is 6 sigma

Currently, we are investing 10 billion won of bonds (3 years
maturity, 6% face value), with a maturity rate of 10% and a
duration of 2.78 years.
When the annual volatility of the bond yield is 0.45%, calculate
the annual VaR of the bond under the delta normal method at the 95%
confidence level.

A bio-technology company is looking to invest $25 billion in new
technology that is expected to produce incremental cash flows of $7
billion, $10 billion, and $12 billion in each of the next three
years, respectively. The CFO has asked that you and your team
determine whether or not the company should invest in the new
technology. In order to finance the project, the company will issue
new bonds and new equity.
Of the $25 billion in costs, $16 billion...

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