Question

Treat each situation separately; show all calculations. Critical value: 1.65(95%); 2.33(99%)

(a) You are holding a stock whose current value is s 4, 000. Over the last year, histoncal data show that daily returns of this share have averaged 0.012 percent per day, and the daily standard deviation has been 0.06 percent. Assume that the daily retums follow a normal distribution. At a 99% level of confidence, how large a loss might occur on this stock luring the next 10 days?(Please consider both the absolute dollar loss and the loss relative

to the expected profit).

(b) Currently your portfolio value is $60,000. According to your estimation, the expected profit for your portfolio will be $3,000 in the next year. If the yearly VAR(mean) at 99% confidence level is $7, 500, at a 99% confidence, how large might the minimum portfolio value and your absolute dollar loss of your portfolio be in the next year?

(c) The VAR of XXx bank is $40 million under the RiskMetrics system(95% confidence level, over one day). What is the VAR of XXX bank under the Basel proposal(99% confidence level, over 10 days)?

d)a portfolio includes asset A and B. The weights in asset A and B are 0.4 and 0.6. The returns of asset A and B are independent. Asset A,'s daily VAR at 95% confidence level is S60. The portfolio's daily VAR at 99% confidence is $110. What is the Asset B's weekly

VAR at 99% confidence level?

(e) You have a $200 million portfolio invested in a bond If over a month at the 99 percelevel of confidence, the yield will not increase more than 0.3 percent and the portfol value will not be lower than $194 million dollars, how large are the VaR and modifie-duration of the bond?

Answer 1

1.

Current Value - 4000
Returns of the share - 0.012% per day
Standared Deviation - 0.06% per day
Level of Confidence - 99%
Calculate - Loss on stock during next 10 days

Loss on stock during next 10 days
Volatility in terms of $ shall be
1% of $ 4000 = 40

The Maximum loss for 1 day at 99% confidence level
$ 4000 * 2.33 = $ 9320

and expected maximum loss for 10 days shall be
10 * 9320 = 2947

Loss relative to expected profit = 4000*0.012*10 = 480

Total Loss for 10 days = 2947+480 = 3427