Reference no: EM132211912

Management of Financial Assignment - market risk analysis

Part I. A financial institution has positions described below in debt, equity and currency assets held for trading purposes. (Select and calculate values for each as indicated).

1. Asset 1, a long position in a bond that makes semi-annual coupon payments and returns the principal at maturity. The bond has (specify):

a. a face value between 50 million and 100 million dollars,

b. a maturity between 8 and 16 years,

c. a coupon rate between 4% and 7.5%, and

d. a yield to maturity different from the coupon rate but also between 4% and 7.5%.

2. Asset 2, a short position in a zero coupon bond that has (specify):

a. a face value between 100 million and 200 million dollars,

b. a maturity between 5 and 10 years,

c. a yield to maturity between 4% and 7.5%

3a. Compute the value and modified duration of each asset from questions 1 and 2.

b. Compute the value and modified duration of the financial institution's debt position.

4. Asset 3, an equity portfolio that has (specify):

a. a market value of the portfolio between 100 million and 200 million dollars,

b. a beta between 0.75 and 1.75, but not 1.0.

5. Asset 4, British pounds

b. specify the number of pounds between 30 million and 50 million.

a. specify a short or long position.

6. Asset 5, Canadian dollars, if the financial institution holds a long position in pounds, the position in Canadian dollars is short, and vice versa. Specify a number of Canadian dollars between 50 million and 100 million.

7a. Compute the net dollar value of the financial institution's position in British pounds and in Canadian dollars.

b. Compute the net dollar value of the financial institution's foreign currency holdings.

Part 2. Use the daily interest rates, S&P 500 Index values, and exchange rates from the file: "data for assignment 5", to answer the following about the market risk of the assets in Part 1.

Using the RiskMetrics model:

8a. Calculate the daily earnings at risk (DEAR) values for each asset if adverse movements are set at a 1.0% level?

b. What is the 5-day value at risk for each asset if the adverse movement is set at a 1.0% level?

9a. Calculate the daily earnings at risk (DEAR) values for each asset if adverse movements are set at a 0.5% level?

b. What is the 5-day value at risk for each asset if the adverse movement is set at a 0.5% level?

Using back simulation:

10a. Calculate the daily earnings at risk (DEAR) values for each asset if adverse movements are set at a 1.0% level?

b. What is the 5-day value at risk for each asset if the adverse movement is set at a 1.0% level?

11a. Calculate the daily earnings at risk (DEAR) values for each asset if adverse movements are set at a 0.5% level?

b. What is the 5-day value at risk for each asset if the adverse movement is set at a 0.5% level?

12a. For one of the assets, explain what the DEAR values in questions 8 through 10 mean.

b. For one of the assets, explain what the VaR values in questions 8 through 10 mean.

Part 3. Market risk for a portfolio

13a. Using the RiskMetrics method, determine the daily earnings at risk (DEAR) for the financial institution's portfolio at the 1.0% level.

b. Calculate the 5-day value at risk for the portfolio at the 1.0% level.

14. Using the back simulation method, determine the daily earnings at risk (DEAR) for the financial institution's portfolio at the 1.0% level.

b. Calculate the 5-day value at risk for the portfolio at the 1.0% level.

Attachment:- Assignment Files.rar