Risk Management

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Risk Management Exercises

description

Risk Management. Exercises. Exercise. Value at Risk calculations. Problem. Consider a stock S valued at $1 today, which after one period can be worth S T : $2 or $0.50. Consider also a convertible bond B, which after one period will be worth max(1, S T ). - PowerPoint PPT Presentation

Transcript of Risk Management

Page 1: Risk Management

Risk Management

Exercises

Page 2: Risk Management

Exercise

Value at Risk calculations

Page 3: Risk Management

Problem

Consider a stock S valued at $1 today, which after one period can be worth ST: $2 or $0.50.

Consider also a convertible bond B, which after one period will be worth max(1, ST).

Determine which is the following three portfolios has lower VaR:

1. B

2. B-S

3. B+S

Page 4: Risk Management

FRM exam 1999

The VaR of one asset is 300, and another one is 500. If the correlation between changes in asset prices is 1/15, what is the combined VaR?

1. 525

2. 775

3. 600

4. 700

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Exercise

Hedging

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Problem

Consider a stock S valued at $1 today, which after one period can be worth ST: $2 or $0.50.

Consider also a convertible bond B, which after one period will be worth max(1, ST).

Determine the optimal trading strategy adding a stock portfolio to the bond.

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Exercise

Credit risk

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Problem

Consider a stock S valued at $1 today, which after one period can be worth ST: $2 or $0.50.

Consider also a convertible bond B, which after one period will be worth max(1, ST).

Assume the stock can default, after which event ST=0.

Determine which is the following three portfolios has lower Credit-VaR:

1. B2. B-S3. B+S


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