Homework 3

Use a VaR calculator such as the NORM.INV function in Excel to calculate the combined VaR of the three stock investments and the traded option hedge in Attachment 1, where you must first calculate the daily returns and standard deviations of the individual positions and the combined position, then calculate the 1 Day VaR and 10-day VaR of each of the three stock investments to a 99% confidence interval, then answer the following questions.

Note that the equivalent SPX position of the option hedge can be derived from the option delta, the # of contracts, the # of options per contract, and the spot price of SPX.

Give brief details of how you calculated each answer.

  • What is the combined 10-day, 99% confidence interval VaR of Investments A, B, C and Hedge D?
  • What are the individual 10-day, 99% confidence interval VaR’s of Investments A, B and C?
  • What is the arithmetic sum of the individual 10-day, 99% confidence interval VaR’s of Investments A, B, C and Hedge D?
  • How might you improve the VaR estimate for the option hedge?
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