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VAR_Revision_Tutorial_Sols

# VAR_Revision_Tutorial_Sols - BUS3026W Finance II 2007...

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BUS3026W Finance II 2007 - Tutorial 10 Solutions ______________________________________________________________ Question One In practice conversions would be done based on trading days or months and not the actual number of days or months in a year. So, for example, because securities only trade 5 days a week, when converting from daily to annual figures the number of periods used would typically be 260 days (52 weeks * 5 trading days per week) less any public holidays which fell on weekdays. For our purposes, however, we will simply work with full time periods for simplicity. If you have actually calculated trading days for the calculations below, well done. 1. We need to convert to an annual mean and standard deviation: Annual mean = 0.05% x 365 = 18.25% Annual standard deviation = SQRT(365) x 1.5% = 28.66% A loss of R20 million or more on our portfolio would represent a percentage loss of 20%. Converting this to a standard normal variable we find: x* = (-0.2 – 0.1825)/0.2866 = -1.334 Checking this against our tables, we find the probability associated with a loss of R20 million or more is roughly 9%.

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