Posted: November 10th, 2015

Market Risk

Management of Financial Institutions

Part I. Select values as indicated for the following assets held by a financial institution for trading:

1a. Asset 1, a long position in a bond that makes annual coupons payments and repays the full amount of the

principal at maturity and has:

a face value between 50 million and 100 million dollars,

a maturity between 8 and 17 years,

a coupon rate between 4% and 8%, and

a yield to maturity different from the coupon rate but also between 4% and 8%.

b. Compute the value and duration of this bond.

2a. Asset 2, a short position in a zero coupon bond that has:

a face value between 100 million and 200 million dollars,

a maturity between 5 and 10 years,

a yield to maturity between 4% and 8%

b. Compute the value a duration of this bond.

3a. Asset 3, an amortized loan that makes level annual payments of principal and interest and is fully amortized at maturity, i.e., there is no balloon payment because the regular payments have repaid all the principal:

a face value between 25 million and 50 million dollars,

a maturity between 12 and 25 years,

a coupon rate between 4% and 8%, and

a yield to maturity different from the coupon rate but also between 4% and 8%.

b. Compute the value and duration of this loan.

4a. Asset 4, British pounds:

a short or long position in British pounds, and

a number of pounds between 30 million and 50 million.

b. Compute the value of this asset in dollars.

5a. Asset 5, Brazilian reals (long if the company has a short position in British pounds and short if the company has a long position in pounds):

a number of real between 100 million and 300 million.

b. Compute the value of this asset in dollars.

6. Asset 6, an equity portfolio:

a market value of the portfolio between 50 million and 100 million dollars,a beta between 0.75 and 1.75, but not equal to 1.0.

Part 2 Use daily interest rate, exchange rate, and market data from the file: assignment 4 data, to answer the following:

1. Using the Risk Metrics model, determine the daily earnings at risk for each of the six assets if adverse movements are set at a 5% level.

2. Using the Risk Metrics model, determine the value at risk over 10 days if the adverse movement is set at a 5% level.

3. Using the Risk Metrics model, determine the daily earnings at risk for each of the six assets if adverse movements are set at a 1% level.

4. Using the Risk Metrics model, determine the value at risk over 3 days if the adverse movement is set at a 1% level.

5. Using historic back simulation, determine the daily earnings at risk for each of the six assets if adverse movements are set at a 5% level.

6. Using historic back simulation, determine the value at risk over 10 days if the adverse movement is set at a 5% level.

7. Using historic back simulation, determine the daily earnings at risk for each of the six assets if adverse movements are set at a 1% level.

8. Using historic back simulation, determine the value at risk over 3 days if the adverse movement is set at a 1% level.

9a. Using the RiskMetrics method, determine the daily earnings at risk for the portfolio of assets 1, 4 and 6 if the adverse movement is set at the 5% level.

b. What is the 5-day value at risk for this portfolio?

10a. Using historic back simulation, determine the daily earnings at risk for the portfolio of assets 1, 4, and 6 if the adverse movement is set at a 5% level.

b. What is the 5-day value at risk for this portfolio?

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