6.The DEAR for a bank is $8500. What is the VAR for a 10-day period? A 20-day period? Why is the VAR for a 20-day period not twice as much as that for a 10-day period?

For the 10-day period: VAR = 8500 x [10]½ = 8500 x 3.1623 = $26 879.36

For the 20-day period: VAR = 8500 x [20]½ = 8500 x 4.4721 = $38 013.16

The reason that VAR20 (2 x VAR10) is because [20]½ (2 x [10]½). The interpretation is that the daily effects of an adverse event become less as time moves farther away from the event.

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

The market risk calculations are typically based on the trading portion of an FI’s fixed-rate asset portfolio because these assets must reflect changes in value as market interest rates change. As such, duration or modified duration provides an easily measured and usable link between changes in the market interest rates and the market value of fixed-income assets.

12.Bank of Ayers Rock’s stock portfolio has a market value of $10 000 000. The beta of the portfolio approximates the market portfolio, whose standard deviation (m) has been estimated at 1.5 per cent. What is the 5-day VAR of this portfolio, using adverse rate changes in the 99th percentile?

DEAR= ($ value of portfolio) x (2.33 x m ) = $10m x (2.33 x .015)
= $10m x .03495 = $0.3495m or $349 500

VAR= $349 500 x 5 = $349 500 x 2.2361 = $781 505.76

14. Calculate the DEAR for the following portfolio with and without the correlation coefficients.
Estimated
Assets DEAR S,FXS,BFX,B
Stocks (S)$300 000-0.100.750.20
Foreign exchange (FX)$200 000
Bonds (B)$250 000

What is the amount of risk reduction resulting from the lack of perfect positive correlation between the various assets groups?

The DEAR for a portfolio with perfect correlation would be $750 000. Therefore the risk reduction is...

...MarketRisk
The securities held by banks are divided into two types they are: SLR Securities and Non-SLR Securities. In case of SBH they hold securities like Government securities, Private/Corporate securities, and equities in the form of gold, cash, mutual funds and equity oriented securities like stocks. These securities are subject to the risk of losses in positions arising from movements in market prices calledMarketRisk. The marketrisks include:
Equity risk, the risk that stock or stock indexes prices and/or their implied volatility will change.
Interest rate risk, the risk those interest rates and/or their implied volatility will change.
Currency risk, the risk that foreign exchange rates and/or their implied volatility will change.
Commodity risk, the risk that commodity prices and/or their implied volatility will change.
Traditionally, convention used to measure the potential loss amount due to marketrisk is to use Value at Risk. The SBH uses its own VAR model known as Fedai-Var model and the risks involving Interest rate risk and Currency risk are majorly taken into consideration, all these are calculated under 99.7% confidence level (...

...Dr. Sudhakar Raju
FN 6700
ASSIGNMENT 4 - QUESTIONS ON MARKETRISK (VALUE AT RISK)
1. What is meant by marketrisk?
2. Why is the measurement of marketrisk important to the manager of a financial institution?
3. What is meant by daily earnings at risk (DEAR)? What are the three measurable components? What is the price volatility component?
4. Follow bank has a $1 million position in a five-year, zero-coupon bond with a face value of $1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change in daily yields is 0.0 percent, and the standard deviation is 12 basis points.
a. What is the modified duration of the bond?
b. What is the maximum adverse daily yield move given that we desire no more than a 5 percent chance that yield changes will be greater than this maximum?
c. What is the price volatility of this bond?
d. What is the daily earnings at risk for this bond?
5. What is meant by value at risk (VAR)? How is VAR related to DEAR in J.P. Morgan’s RiskMetrics model? What would be the VAR for the bond in problem (4) for a 10-day period? With what statistical assumption is our analysis taking liberties? Could this treatment be critical?
6. The DEAR for a bank is $8,500. What is the VAR for a 10-day...

...How is risk priced in the financialmarkets? What are the shortcomings of the explanations that finance theory offers for this?
Introduction
The valuation of assets in the financialmarket is no doubt a challenging task as it is closely correlated with risks and uncertainties embodied in the assets which provide the possibility that the investment outcomes would differ from the expected value (Grundy and Malkiel, 1995). In other words, the valuation of assets is actually linked to the qualification of risk-return trade-off. Up until the introduction of Capital Asset Pricing Model (CAPM) in 1964, the estimation of risk was largely based on the historical performances of individual security rather than a precise geometric or mathematic relationship. Therefore, this essay would contribute a lot to the discussions on CAPM and the Arbitrage Pricing Model as well as their comparison.
Theoretical Background
One fundamental theory behind CAPM and other asset pricing models is the portfolio selection theory which is contributable to Markowitz (1959), Tobin (1959 and 1966). Markowitz points out that under mean-variance criterion, the optimal portfolio should be the set of securities that provide the preferable expected rate of return with the minimum volatility. In addition to this theory, James Tobin proposed that every investor has his own individual preference...

...Case Problem 1: Measuring Stock MarketRisk
As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)
A) Selected descriptive statistics follow:
Variable N Mean StDev Minimum Median Maximum
Microsoft 36 0.00503 0.04537 -0.08201 0.00400 0.08883
Exxon Mobil 36 0.01664 0.05534 -0.11646 0.01279 0.23217
Caterpillar 36 0.03010 0.06860 -0.10060 0.04080 0.21850
Johnson & Johnson 36 0.00530 0.03487 -0.05917 -0.00148 0.10334
McDonald’s 36 0.02450 0.06810 -0.11440 0.03700 0.18260
Sandisk 36 0.06930 0.19540 -0.28330 0.07410 0.50170
Qualcomm 36...

...Market Potential
A market potential is an estimate of the maximum possible sales
opportunities for a commodity or group of commodities open to all sellers in
a particular market segment for a stated period under consideration
Before going to the stage of establishing market potential, commodity
grouping must be established in such a way that the individual
commodities concerned are uniform with respect to the demand
function.
Since most products do not greatly differ from others, consumers
often resort to product substitution.
So in order to accurately arrive at a market potential for a product the
degree of product substitution and the conditions under which it takes
place have to be considered.
The decision as to include or exclude closely related substitutes would
have a significant effect over the market potential. E.g. Furniture –
wood, leather, steel feather light etc.
Several market potentials for a product can be arrived at by making
different assumptions.E.g.tooth paste.
Methods of calculating Market potentials:
Direct Data Method: In this method the data on the actual product for
which one wishes to estimate market potential is collected.
Collecting data about the sales for a particular product in the entire
market from the various retail outlets.
Advantages: These are the actual sales for a...

...Jason Hurley
FINA 3144, Dr. Glegg
FinancialMarkets Excel Project
Part 1:
1. The bond prices are all different due to the coupon payments and the years left to maturity all being different for each bond. Since each bond’s coupon rate is different, it has a direct effect on the coupon payments for each bond, which makes each bond price different.
2. The duration for each bond tells you what is the total percentage increase or decrease each year for the weighted values of each bond. For bond B and C, the weighted maturity for each year keeps increasing while bond A’s weighted maturity stays in a consistent range for multiple years.
3. With an expected percentage change relating to the duration and nominal interest rate of 3.54%, and a constant inflation rate, bond A will be the most sensitive to the change in interest rates.
Part 2:
1. Bond A has the highest expected return of 11.48%. This is due to the high yields that bond A has for each probability, which in turn gives a higher expected return.
2. The riskiest bond would be bond A, due to the expected return of 11.48% and the standard deviation of 8.06% being the highest of the three. The higher the expected return and standard deviation, the riskier the asset will be.
Part 3:
1. With each company having a loss in capital within the time period of January 3rd, 2007, through March 9th, 2009, Freddie Mac has the biggest loss with a drop of...

...ranged from $168-$550. Comparing this to nearby resorts such as Siloso Beach Resorts and Goldkist Beach Bay Resorts, it is rather low. As we can see, the minimum nightly rate is $154, $24 more than Montego Bay Apartments. If Montego Bay Apartments closed the gap between the difference, higher profits can be made. However, that is if Montego Bay Apartments can differentiate itself from its competitors. In the long run, the profits generated by closing the gap would eventually be a significant figure.
The 3-night minimum rule is also a factor affecting profitability. By turning away customers who wish to stay for less than 3 nights, they are turning away extra revenue that could increase their profits. By doing this, it reduces their target market. With a reduced amount of customers, revenue will definitely drop because they are not fully utilizing the rooms that are available. From the spreadsheet, it can also be seen that they had a fixed rate per night. By only having fixed rates per night, it would reduce their profits for some periods of the year. They should adjust their rates per night based on the seasons and holidays throughout the year. Holiday periods such as Chinese New Year, Christmas and school holidays will have a tendency of having more bookings. If there is an increase in the rates during these periods, revenue would increase substantially. Without making changes to the way they charge customers, future decline would be inevitable due to...

...two banking models bases on the way their foreign assets are financed. The international model of banking system gather their funds via domestic market and then allocated to borrowers in a foreign market. By contrast, Global Banking generates funds in a foreign market and finances its claims on borrower in the same foreign market. In this way we can see that international bank concentrates on cross border business while global bank mainly focus on local market businesses.
b/ Identify five ways in which a bank headquartered in the USA can fund loans to a borrower in Japan, and classify them as examples of international or global banking
With reference to the article, we can distinguish five ways which an USA bank can fund loans to a borrower located in Japan as follows:
* USA depositors deposit their saving to Bank Head Office which allow them to make loans to Japan borrowers via cross-border loan processing. Since this process involves cross-boundary it is considered as International Banking.
* USA customers make deposit to head office where in turn deposits these funds at its Bank affiliate in Japan. The Bank affiliate then give these funds as loans to Japan borrowers. This is also an International banking system.
* Another way to fund loan in this case is that Head Office in USA gets deposits directly in Japan market and in turn gives loans to Japan borrowers. The...