Essay regarding Questions in Market Risk

Dr . Sudhakar Raju

FN 6700

ASSIGNMENT 4 -- QUESTIONS ABOUT MARKET RISK (VALUE FOR RISK)

1 ) What is meant by industry risk?

2 . Why is the measurement of market risk important to the manager of a financial institution?

a few. What is supposed by daily earnings at risk (DEAR)? Exactly what are the three considerable components? Precisely what is the price unpredictability component?

4. Follow traditional bank has a $1 million position within a five-year, zero-coupon bond having a face worth of $1, 402, 552. The relationship is trading at a yield to maturity of 7. 00 percent. The historic mean difference in daily produces is zero. 0 percent, and the normal deviation can be 12 basis points.

a. What is the modified duration of the bond?

b. What is the maximum undesirable daily produce move given that we desire no more than a 5 percent chance that deliver changes will probably be greater than this maximum?

c. What is the price volatility on this bond?

deb. What is the daily profits at risk in this bond?

a few. What is supposed by benefit at risk (VAR)? How is usually VAR associated with DEAR in J. G. Morgan's RiskMetrics model? What would be the VAR for the bond in problem (4) for a 10-day period? Using what statistical presumption is the analysis acquiring liberties? Can this treatment be essential?

6. The DEAR for a bank is definitely $8, 500. What is the VAR to get a 10-day period? A 20-day period? How come the VAR for a 20-day period not really twice as very much as that for a 10-day period?

several. The imply change in the daily brings of a 15-year, zero-coupon connect has been five basis factors (bp) in the last year using a standard change of 15 bp. Use these data and assume the produce changes are typically distributed.

a. What is the very best yield change expected if the 90 percent confidence limit is required; that is, adverse moves will not take place more than one time in 20?

b. Precisely what is the highest produce change predicted if a ninety five percent self confidence limit is necessary?

8. In what sense is definitely duration a measure of marketplace risk?

on the lookout for. Bank Alpha dog has an products on hand of AAA-rated, 15-year zero-coupon bonds having a face benefit of $400 million. The bonds at the moment are containing 9. 5% in the over-the-counter market.

a. What is the modified duration of these a genuine?

b. Precisely what is the price volatility if the potential adverse move around in yields can be 25 basis points?

c. What is the DEAR?

d. In the event the price movements is based on a 90 percent confidence limit and an agressive historical difference in daily produces of zero. 0 percent, what is the implied common deviation of daily yield changes?

10. Bank Two has a stock portfolio of a genuine with a their market value of one-hundred dollar million. The bonds come with an estimated price volatility of 0. 95 percent. What are the SPECIAL and the 10-day VAR for the bonds?

11. Bank of Southern Vermont has decided that it is inventory of 20 , 000, 000 German deutsche marks (DM) and 25 million English pounds (BP) is controlled by market risk. The spot exchange rates happen to be $0. 40/DM and $1. 28/BP, respectively. The ('s of the location exchange rates of the DM and BP, based on the daily adjustments of location rates in the last six months, are 65 bp and forty five bp, respectively. What is the bank's 95%, 10-day VAR for both equally currencies?

12. Bank of Alaska's stock portfolio contains a market value of $10, 1000, 000. The daily unpredictability of the share portfolio is usually estimated by 1 . fifty percent. What is the 5-day, 99% VAR of this portfolio?

13. Jeff Resnick, vice president of operations of preference Bank, is definitely estimating the SD from the bank's collection of resources consisting of loans (L), foreign exchange (FX), and common inventory (EQ). The person DEARs are $300, 700, $274, 500, and $126, 700 correspondingly. The correlation coefficients between L and FX, L and FREQUENCY, and FX and EQ are 0. 3, zero. 7, and 0. 0, respectively.

a. ) Precisely what is the Variance of the mixture portfolio?

m. ) Precisely what is the SECURE DIGITAL of the portfolio?

14. Compute the SD of the diversified and undiversified portfolio depending on the...