Wila is a risk-analyst at Deli Bank (DB), a commercial bank with operations in Zambia. DB is currently expanding its operations to include proprietary trading and is reviewing its risk management policies. DB uses Value at Risk (VaR) models to monitor its risk exposures. DB`s current portfolio of currencies contains only long positions. The volatility of the currencies in its portfolio has recently increased, and Wila expects volatility to remain high over the next several quarters. As a result, she has hedged the portfolio using currency options. (i) Explain value at Risk as a measure of market risk and the key elements involved when interpreting VAR. (ii) Outline the three methods used to calculate VAR. (iii) For hedging purpose, the client is of the opinion that the delta normal method is the most appropriate method. Advise the client on the appropriateness of the method.
Wila is a risk-analyst at Deli Bank (DB), a commercial bank with operations in Zambia. DB is currently expanding its operations to include proprietary trading and is reviewing its risk management policies. DB uses Value at Risk (VaR) models to monitor its risk exposures. DB`s current portfolio of currencies contains only long positions. The volatility of the currencies in its portfolio has recently increased, and Wila expects volatility to remain high over the next several quarters. As a result, she has hedged the portfolio using currency options. (i) Explain value at Risk as a measure of market risk and the key elements involved when interpreting VAR. (ii) Outline the three methods used to calculate VAR. (iii) For hedging purpose, the client is of the opinion that the delta normal method is the most appropriate method. Advise the client on the appropriateness of the method.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Wila is a risk-analyst at Deli Bank (DB), a commercial bank with operations in Zambia. DB is currently expanding its operations to include proprietary trading and is reviewing its risk management policies. DB uses Value at Risk (VaR) models to monitor its risk exposures.
DB`s current portfolio of currencies contains only long positions. The volatility of the currencies in its portfolio has recently increased, and Wila expects volatility to remain high over the next several quarters. As a result, she has hedged the portfolio using currency options.
(i) Explain value at Risk as a measure of market risk and the key elements involved when interpreting VAR.
(ii) Outline the three methods used to calculate VAR.
(iii) For hedging purpose, the client is of the opinion that the delta normal method is the most appropriate method. Advise the client on the appropriateness of the method.
(iv)Consider a position consisting of a K200,000 investment in Asset A and a K300,000
investment in Asset B. Assume that the daily volatilities of the assets are 1.5% and 1.8% respectively, and that the coefficient of correlation between their returns is 0.4. What is the
five day 95% Value at Risk (VaR) for the portfolio (95% confidence level represents 1.65
standard deviations on the left side of a
Transcribed Image Text:Wila is a risk-analyst at Deli Bank (DB), a commercial bank
with operations in Zambia. DB is currently expanding its
operations to include proprietary trading and is reviewing its risk
management policies. DB uses Value at Risk (VaR) models to
monitor its risk exposures.
DB's current portfolio of currencies contains only long
positions. The volatility of the currencies in its portfolio has
recently increased, and Wila expects volatility to remain high
over the next several quarters. As a result, she has hedged the
portfolio using currency options.
(i) Explain value at Risk as a measure of market risk and the
key elements
involved
when interpreting VAR.
(ii) Outline the three methods used to calculate VAR.
(iii) For hedging purpose, the client is of the opinion that the
delta normal method is the most appropriate method.
Advise the client
on
the appropriateness of the
method.
(iv)
investment in Asset A and a K300,000
investment in Asset B. Assume that the daily volatilities of the
assets are 1.5% and 1.8% respectively, and that the coefficient of
Consider a position consisting of a K200,000
correlation between their returns is 0.4. What is the
five day 95% Value at Risk (VaR) for the portfolio (95%
confidence level represents 1.65
standard deviations on the left side of a normal distribution)?
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