(a) Fixed-income securities (Bonds): The bank holds a 15-year zero coupon bond with a face value of AUD$2,000,000. The bond is trading at a yield to maturity of 4 percent. The potential adverse move in yields is 0.75%. * REQUIRED: Answer (a)(i) & (a)(ii) below (a) (i) What causes bond yields to change on a daily basis? [2 marks] (a) (ii) Calculate the 90% DEAR for Fixed Income, based on the given data. [3 marks] (b) Equities: The bank holds an AUD$8 million trading position in stocks that reflects the stock market index (the = 1). Over the last year, The historical mean change in the stock market index was 0.0 per cent and the standard deviation of the stock market index was 1.6%. * REQUIRED: Answer (b)(i)(b)(ii) below (b) (i) Carefully explain how can we interpret the statement in the question that the stock market index had a mean daily return of 0.0% with a standard deviation of 1.8%. [2 marks] (b) (ii) Calculate the 90% DEAR for Equities, based on the given data. [2 marks] (c) Foreign exchange: The bank has a net long position of 10 million Euros (10M) at the close of business on a particular day. The exchange rate is AU$ 1.6393/1 (i.e. 1.6393 AUD = 1) at the daily close. Looking back at the daily changes in the exchange rate of the euro to AUD for the past year, the bank finds that the historical mean change in daily exchange rates was 0.0 per cent and the volatility or standard deviation (o) of the spot exchange rate was 0.63%. *REQUIRED: Answer (c)(i) -c(ii) below (c) (i) What causes movements in the exchange rate? [2 marks] (c) (ii) Calculate the 90% DEAR for FX, based on the given data. [2 marks] Now assume correlations (Pij) among assets are as follows Foreign Exchange Stocks Bond 0.3 0.4 Foreign Exchange -0.2 * REQUIRED: Answer (d)(1)-(d)(ii) below (d) (i) Calculate the Portfolio DEAR, using a 90% Confidence Level. [4 marks] (d) (ii) Calculate the 5-day Value at Risk (VAR) of FIM Bank's trading portfolio if a 90% confidence level is required. [1 mark] (d) (iii) Explain how the VAR position would be interpreted. [2 marks] (a) Fixed-income securities (Bonds): The bank holds a 15-year zero coupon bond with a face value of AUD$2,000,000. The bond is trading at a yield to maturity of 4 percent. The potential adverse move in yields is 0.75%. * REQUIRED: Answer (a)(i) & (a)(ii) below (a) (i) What causes bond yields to change on a daily basis? [2 marks] (a) (ii) Calculate the 90% DEAR for Fixed Income, based on the given data. [3 marks] (b) Equities: The bank holds an AUD$8 million trading position in stocks that reflects the stock market index (the = 1). Over the last year, The historical mean change in the stock market index was 0.0 per cent and the standard deviation of the stock market index was 1.6%. * REQUIRED: Answer (b)(i)(b)(ii) below (b) (i) Carefully explain how can we interpret the statement in the question that the stock market index had a mean daily return of 0.0% with a standard deviation of 1.8%. [2 marks] (b) (ii) Calculate the 90% DEAR for Equities, based on the given data. [2 marks] (c) Foreign exchange: The bank has a net long position of 10 million Euros (10M) at the close of business on a particular day. The exchange rate is AU$ 1.6393/1 (i.e. 1.6393 AUD = 1) at the daily close. Looking back at the daily changes in the exchange rate of the euro to AUD for the past year, the bank finds that the historical mean change in daily exchange rates was 0.0 per cent and the volatility or standard deviation (o) of the spot exchange rate was 0.63%. *REQUIRED: Answer (c)(i) -c(ii) below (c) (i) What causes movements in the exchange rate? [2 marks] (c) (ii) Calculate the 90% DEAR for FX, based on the given data. [2 marks] Now assume correlations (Pij) among assets are as follows Foreign Exchange Stocks Bond 0.3 0.4 Foreign Exchange -0.2 * REQUIRED: Answer (d)(1)-(d)(ii) below (d) (i) Calculate the Portfolio DEAR, using a 90% Confidence Level. [4 marks] (d) (ii) Calculate the 5-day Value at Risk (VAR) of FIM Bank's trading portfolio if a 90% confidence level is required. [1 mark] (d) (iii) Explain how the VAR position would be interpreted. [2 marks]
