# Financial Markets and Market Risk Calculations

Satisfactory Essays
583 Words
Grammar
Plagiarism
Writing
Score
Financial Markets and Market Risk Calculations
Topic 7 – self attempt tute questions Chapter 12

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,FX S,B FX,B Stocks (S) \$300 000 -0.10 0.75 0.20 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 \$750 000

## You May Also Find These Documents Helpful

• Good Essays

In general, stocks have an approx.. correlation (p)= 0.35, so risk lowered but not eliminated…

• 3597 Words
• 12 Pages
Good Essays
• Satisfactory Essays

CV: this variance is used to determine if a project is ahead or behind schedule = \$336.35…

• 297 Words
• 2 Pages
Satisfactory Essays
• Good Essays

Stock BBT has an expected return of 19% and a standard deviation of 23%. Stock DIS has an expected return of 13% and standard deviation of 17%.The correlation coefficient between the returns of the two stocks is 0.3. The risk free rate of return is 8%.…

• 1422 Words
• 7 Pages
Good Essays
• Satisfactory Essays

Variance: 1,112 is 6160.5; 1,1245 is 29768; 1,361 is 64800; 1,372 is 68820.5; 1,472 is 110920.5…

• 897 Words
• 4 Pages
Satisfactory Essays
• Satisfactory Essays

1. Ester Ltd. is planning to launch a new brand of makeup product. Based on market research, if yearly sales are high they can make a profit of \$2.9 million. If yearly sales are 'so so' they can make a profit of \$0.6 million. Finally, if yearly sales are low they can lose \$1.1 million. The probability that yearly sales will be high is 0.31 and the probability that yearly sales will be so-so is 0.41. Calculate the variance of profit for the new brand of makeup product (in \$millions2). Give your answer to two decimal places.…

• 867 Words
• 4 Pages
Satisfactory Essays
• Satisfactory Essays

Now, price variance is AQ(SP-AP), or 28000(\$.3)=\$8400 (This is favorable, since the materials were obtained at below average cost.)…

• 443 Words
• 2 Pages
Satisfactory Essays
• Satisfactory Essays

E[RB ] = 0.3 × 0.14 + 0.4 × (−0.04) + 0.3 × 0.08 = 0.05 = 5%.…

• 1969 Words
• 14 Pages
Satisfactory Essays
• Good Essays

These variances tell that higher than expected volume should have resulted in revenues being \$100,000 greater than expected. However, this potential revenue…

• 675 Words
• 3 Pages
Good Essays
• Good Essays

Determine the revenue variance from Arcadia Hospital’s 2005 budget. Is the variance positive or negative?…

• 317 Words
• 2 Pages
Good Essays
• Satisfactory Essays

sales price variance  assume budgeted sales of 11,500 bicycles for total budgeted sales of \$13,213,500…

• 429 Words
• 2 Pages
Satisfactory Essays
• Good Essays

1. (6 points) Daily demand for the ice creams at I-Scream parlor is normally distributed with a mean of 160 quarts and a standard deviation of 100 quarts. The owner has the ice cream supplied by a wholesaler who charges \$2.20 per quart. The ice cream sells for \$4 per quart. The wholesaler charges a \$400 delivery charge independent of order size. It takes 4 days for an order to be supplied. The opportunity cost of capital to I-Scream is estimated to be 25% per year. Assume 360 days in the year.…

• 1559 Words
• 7 Pages
Good Essays
• Satisfactory Essays

VAC: Which would be the Variance at completion/ the difference of the budget and the estimated cost at completion VAC= BAC-EAC \$1090.35…

• 321 Words
• 2 Pages
Satisfactory Essays
• Satisfactory Essays

5. "The average annual return on the Standard and Poor's 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market…

• 519 Words
• 3 Pages
Satisfactory Essays
• Satisfactory Essays

Quantity variance = (27 x 470 – 23 x 800) x \$10 = \$57,100 U…

• 488 Words
• 2 Pages
Satisfactory Essays
• Satisfactory Essays

(c) If you plan to hold this bond for one year, what is the VAR in…

• 605 Words
• 3 Pages
Satisfactory Essays