Reference no: EM132978835
Question 1
Choice Bank has an inventory of AAA-rated, 10-year zero-coupon bonds with a face value of $100 million. The modified duration of these bonds is 12.5 years, the DEAR is $2 150 000 and the potential adverse move in yields is 35 basis points.
a. What is the market value of the bonds?
b. What is the yield on the bond?
c. What is the duration of the bond?
Question 2
Liam, risk manager for Choice Bank, is estimating the aggregate DEAR of the bank's portfolio of assets consisting of Seven-year zero-coupon bonds (B), foreign currencies (FX), and ordinary shares (EQ) The individual DEARs are $10 770, $9 320 and $33 000, respectively. If the correlation coefficients are presented in the following table.
B
FX
EQ
B
-
-0.2
0.4
FX
-
0.1
EQ
-
a. Calculate the DEAR of the aggregate with perfect correlation?
b. Calculate the DEAR of the aggregate portfolio with the correlation coefficients
c. What is the risk reduction for the DEAR portfolio from part a and part b?
Question 3
Choice Bank has determined that its inventory of yen (¥) and Swiss franc (SF) denominated securities is subject to market risk. The spot exchange rates are ¥95.50/$ and SF1.075/$, respectively. The σ's of the spot exchange rates of the ¥ and SF, based on the daily changes of spot rates over the past six months, are 75 bp and 55 bp respectively. Using adverse rate changes in the 90th percentile, the 10-day VARs for the two currencies, ¥ and SF, are $250 000 and $400 000, respectively.
a. Calculate the DEAR for the two currencies
b. Calculate the foreign exchange volatility for the two currencies.
c. Calculate the yen and Swiss franc-denominated value positions for Choice.
Question 4
Choice Bank's stock portfolio has a market value of $500 million. The beta of the portfolio approximates the market portfolio, whose standard deviation (sm) has been estimated at 2.25 per cent. What is the five-day ES of this portfolio using adverse rate changes in the 99th percentile?
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