Question

An FI has £5 million in its trading portfolio on the close of business on a particular day. The current exchange rate of pounds for dollars is £0.6400/$, or dollars for pounds is $1.5625, at the daily close. The volatility, or the standard deviation (σ), of daily percentage changes in the spot £/$ exchange rate over the past year was 58.5 bp. The FI is interested in adverse moves–bad moves that will not occur more than 1 percent of the time, or 1 day in every 100 days. Calculate the one-day VAR and ES from this position.

Answer 1