Review for E2_ans_Fall11_detailed solutions - FINANCIAL...

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FINANCIAL INSTITUTIONS MANAGEMENT REVIEW FOR EXAM 2. Problem 1. You have to estimate the aggregated 5 - day VAR for the BOND, FOREX and Equity portfolios. The bond portfolio consists of 15-year coupon bonds with a face value of $5 million, coupon rate 7% and duration 9.5 years. The bonds currently are yielding 9% in the over-the-counter market. The standard deviation of the bonds is 15bp. You also have 100 million positions in Japanese Yen. The current spot exchange rate is 113Yen/1$ and the estimated standard deviation is 55 bp. Your equity portfolio consists of 50 000 common stock with the market price $105 per share and 45 000 preferred stocks with $86 per share. The beta of the portfolio is 1.23. Market standard deviation is 2.8%. Use adverse rate changes in the 95 th percentile and the correlation coefficient between bond and Forex portfolios = 0.2, correlation between forex and equity portfolios = 0.45 and correlation between equity and bond portfolios = -0.15. Solution: Bond portfolio: 5 DAY VAR = 202281.63 Forex portfolio: 5 day VAR = 17 957.803 Equity portfolio 5 day VAR = 1 636 435.5 Portfolio VAR = Calculate by yourself Problem 2 A Bank has a trading position in British Pounds. At the close of business on October 28, the bank had 20 000 000 BP. The exchange rates for the most recent 3 days are given below:
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Review for E2_ans_Fall11_detailed solutions - FINANCIAL...

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