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Explain the variance-covariance method

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Reference no: EM133001587

You are a US resident holding $10m in 30 US stocks and €30m in 50 German stocks. In addition you hold 1.5m plain vanilla European call options on Apple stocks., each with a premium of $10. The call premium has a delta of 0.5 and a gamma of 0.01.

1a) Outline the steps you would take to forecast the one day Value at Risk (VaR) at the 1st percentile, using the variance-covariance method.

Explain any assumptions used and the strengths and weaknesses of your approach.

1b). Repeat the exercise in part "a" using the bootstrap method.

Make any reasonable assumptions to give a clear logical answer.

You may use illustrative figures, algebra, equations and diagrams as you see fit.

Reference no: EM133001587

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