Compare your twelve var estimates with the realized outcomes

Assignment Help Risk Management

Reference no: EM131582675

Module Derivatives and Risk Management

Topics covered -

1. Derivative Securities

2. Forward/Futures Contracts

3. Futures Market and futures pricing

4. Speculation with futures contracts

5. Pricing futures contracts

6. Stock index futures, currency futures- hedging and speculating

7. Option markets

8. Option payoff profiles

9. Uses of options

10. Guaranteed bond- a financial product

11. More on options strategies

12. Pricing options

13. Hedging and volatility

14. Binomial option pricing model (BOPM)

15. Replication portfolio

16. Calculating the values, implied volatility, deltas, and gammas of call and put options using Black-Scholes Model

17. Swaps

18. Pricing interest rate swaps

19. Currency swaps

20. Calculate swap values

21. Introduction to Risk Management

22. Forecasting volatility

23. Forecasting var for more complex portfolio

24. Alternative approaches to measure VAR

Answers to assignment question must apply to the topics covered in the module

Question 1 -

Write a short briefing report to the senior management team of your financial institution (not to exceed 1,500 words).

You work for a building society (i.e. mortgage bank/company) and you want to offer a 10 year fixed rate mortgage at a rate of 2.5%. Your main business is to take short term deposits from retail investors and to offer mortgages. Carefully explain to a new non-executive director how you would hedge the risk of offering such a low fixed rate mortgage. Also outline to the non-executive director how you would calculate the fixed rate mortgage rates which you consider offering.

Question 2 -

The following table contains information about your international equity portfolio. You are based in London and you operate in Pound Sterling. (Please note that on the London Stock Exchange stock prices are reported in pence, whereas in Frankfurt and NY stocks are being quoted in Euros and US Dollars respectively.) Stock price data and exchange rate data are given in the Excel spreadsheet .Write a report to the senior management team about the performance of your risk management systems. Your senior management team is interested in your risk position over the next 10 days, how well it performs and what can be done to reduce your overall risk exposure. Produce a well presented easy to understand report which shows your VaR calculations over the last 6 months.

Table 1 - International Equity Portfolio
Country	Company	Number of Shares
UK	BP	1,050,000
USA	General Electric	336,700
UK	Vodafone	5,152,000
Germany	BMW	237,135
UK	Glaxo	970,000

a. Calculate the 10-day VaR of your portfolio at 95 percent confidence level using the variance covariance approach on the dates given in table 2. (You will have to perform those calculations 12 times.)

Date of Calculation of 10 Day VaR Forecast

1. 3^rd February 2017

2. 17^th February 2017

3. 3^rd March 2017

4. 17^th March 2017

5. 31^th March 2017

6. 14^th April 2017

7. 28^th April 2017

8. 12^th May 2017

9. 26^th May 2017

10. 9^th June 2017

11. 23^rd June 2017

12. 7^th July 2017

b. Calculate the 10 day VaR at 95 percent confidence level using Historic Simulation for all the dates outlined in table 2.

c. Compare your twelve VaR estimates with the realized outcomes. Comment on how well your model has performed and comment on your findings from a risk management perspective.

d. Briefly discuss generally how you could use derivatives to reduce the riskiness of your equity portfolio.

Please state any assumptions you are using in your calculations.

Attachment:- Assignment Files.rar

Reference no: EM131582675

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