that is, 2.33
and 2 percent of the area under
the normal distribution is found beyond ± 2.33 (1 percent under each tail, -2.33
respectively). Thus, for a one-tailed distribution, the 99 percent confidence level will represent
adverse moves that do not occur more than 1 day in 100. In this example, it means 2.33 x 15 =
34.95 bp. Thus, the maximum adverse yield change expected for this zero-coupon bond is an
increase of 5 bp + 34.95 basis points = 39.95, or 0.3995 percent, in interest rates.
What is the highest yield change expected if a 95 percent confidence limit is required?
Bank Three has determined that its inventory of €20 million and £25 million is subject to
market risk. The spot exchange rates are $1.25/€1 and $1.60/£1, respectively. The σ values
of the spot exchange rates of the euro and the pound, based on the daily changes of spot