How is monte carlo simulation useful in addressing

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1.The DEAR for a bank is $8,500. What is the VAR for a 10-day period? A 20-day period? Why is the VAR for a 20-day period not twice as much as that for a 10-day period?

2.Bank Beta 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. What is the market value of the bonds, the yield on the bond, and the duration of the bond?

3.Bank Two has a portfolio of bonds with a market value of $200 million. The bonds have an estimated price volatility of 0.95 percent. What are the DEAR and the 10-day VAR for these bonds?

4.What are the advantages of using the back simulation approach to estimate market risk? Explain how this approach would be implemented

5.What is the primary disadvantage to the back simulation approach in measuring market risk? What effect does the inclusion of more observation days have as a remedy for this disadvantage? What other remedies can be used to deal with the disadvantage?

6.How is Monte Carlo simulation useful in addressing the disadvantages of back simulation? What is the primary statistical assumption underlying its use?

7.What are the two reasons liquidity risk arises? How does liquidity risk arising from the liability side of the balance sheet differ from liquidity risk arising from the asset side of the balance sheet? What is meant by fire-sale prices?

8.What are core deposits? What role do core deposits play in predicting the probability distribution of net deposit drains?

9.What are two ways a DI can offset the liquidity effects of a net deposit drain of funds? How do the two methods differ? What are the operational benefits and costs of each method?

10.What are two ways a DI can offset the effects of asset-side liquidity risk such as the drawing down of a loan commitment?

Reference no: EM13502585

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