On September 25,2008 a portfolio worth $10 million consisting of investments in four stock indices: DJIA, FTSE 100, CAC 40 and NIKKEI 225. The value of the investment in each index o September 25, 2008 is shown in Table 12.1. An excel spreadsheet containing 501 days of historical data on the closing prices of the four indices and a complete set of Var are on the authors website:
Investment portfolio used for VaR Calculations.
Index Portfolio Value ($000s)
DJIA $4,000
FTSE 100 $3,000
CAC 40 $1,000
Nikkei 225 $2,000
Total $10,000
Table
Scenarios generated for September 26, 2008
Scenario Number DJIA FTSE100 CAC 40 Nikkei 224 Portfolio Value (000s) Loss ( $000s)
1 10,977.08 5,187.46 4,236.71 12,252.62 10,021.502 -21.502
2 10,925.97 5,234.87 4,275.48 12,155.54 10,023.327 -23.327
3 11,070.01 5,164.10 4,186.01 11,986.84 9,985,478 14.522
.
.
499 10,831.43 5,057.36 4,117.75 12,030.80 9828.450 171.550
500 11,222.53 5,300.42 4,342.14 11,899.00 10,141.826 -141.826
2) Ch 19 problem 19.13 Discuss whether hedge funds are good or bad for the liquidity of markets.
3) CH 20 problem 20.15 Suppose that a financial institution uses an imprecise model for pricing and hedging a particular type of structured product. Discuss how, if at all, it is likely to realize its mistake.
4) CH20 problem 20.16 A Future prices is currently at $40. The risk-free interest rate is 5%. Some news is expected tomorrow that will cause the volatility over the next three months to be either 10% or 30%. There is a 60% chance of the first outcome and a 40% chance of the second outcome. Use the derivaGem Software to calculate a volatility smile for three-month options.