Your portfolio consists of two sovereign bonds: A zero maturing in three years and a coupon bond maturing in two years, paying a single annual coupon at rate \(4 \%\). Assume a face value of \(€ 1000\) for both bonds. The one-year riskfree forward rates are \(3 \%, 4 \%\), and 5%, respectively, with annual compounding (Actually, the first rate is the annual spot rate, and the last one applies to an investment over the time interval. The amounts invested in the two bonds are \(€ 53,000\) and \(€ 93,000\), respectively (assume asset divisibility). The two bonds have been issued by the same government, and the price is influenced by a spread due to specific country risk. The spread is \(2.3 \%\) at present (applying uniformly to every maturity), and it is subject to a random shock, which we assume uniformly distributed between \(1 \% \mathrm{e}+2 \%\) (hence, the new spread will be in the range between \(1.3 \%\) and \(4.3 \%\) ). Neglecting the passage of time, find value-at-risk at probability level \(97 \%\).

Transcribed Image Text:

[2,3]