Tutorial+171 - (7 b Calculate the 99 1-day VaR of your...

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BUS3026W Finance II 2009 - Tutorial 17 Due: Monday 28 September ______________________________________________________________ Question One Derive the marginal risk decomposition formula for the 95% value at risk of a portfolio of two equities, A and B. Question Two You are given the following information: A portfolio manager has R90m invested in a coupon bond with 1 year to maturity paying 8% of the nominal value per annum (payable semi-annually). ZERO COUPON BONDS Time to Maturity YTM Yield Volatility (per day, %) Average Daily Yield Change (%) 0.5 5.17% 0.72 0.37 1 5.22% 0.88 0.42 The correlation between changes in the 0.5-year yield and the 1-year yield is 0.88. a) Decompose your exposure into equivalent zero-coupon bonds.
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Unformatted text preview: (7) b) Calculate the 99% 1-day VaR of your position. (8) c) Using Marginal Risk Decomposition, decompose the VaR into the risk contributions from the exposure to the 0.5-year interest rate and the 1-year interest rate for our zero coupon exposures. (5) Important: In answering question c, keep in mind that in the absence of price changes and price volatilities for bond investments, the risk factor impacting on our bond is a combination of the duration and the yield change and volatility . With this in mind, you should be able to adjust the marginal risk decomposition formula you used for equities accordingly....
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