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Market Risk Exercise

Author: Albert
May 29th, 2022

VaR calculation of stocks hedged by traded option

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?

Stress test of currencies hedged by forwards

Calculate the value of the portfolio for each of the time periods in Attachments 1-3 using Excel, then answer the following questions. Show your calculations in Attachments 1-3 or in separate Excel spreadsheets.

1. In stress scenario 1, which 2022 time periods show the highest and lowest net Asset/Liability value?

2. In stress scenario 2, which 2023 time periods show the highest and lowest net Asset/Liability value?

3. In stress scenario 3, which 2024 time periods show the highest and lowest net Asset/Liability value?

4. What approximations did you make, if any?
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