Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A related idea of risk measurement is the value at risk (VaR). Instead of calculating the probability of an outcome, VaR expresses the magnitude of

image text in transcribedimage text in transcribed

A related idea of risk measurement is the "value at risk" (VaR). Instead of calculating the probability of an outcome, VaR expresses the magnitude of an extreme result happening over a short time horizon 11, which is often defined as events with the probability of 5% or 1% over a day or a week. For example, if an extreme market movement which would occur just once in 100 days would erode the value of a group of financial assets (a "position"), and the magnitude of such valuation loss was greater than $1 million, the VaR of that position was $1 million. As such, VaR is tied to a certain probability (once in 100 days in this example), and such probability is expressed as the "confidence level," which means the probability of an extreme result not happening. Given that people are concerned with adverse results, the probability is usually "one-sided" (99% in this example) Q13: Regarding UL11, if an investor was exposed to SP500 stock index and her exposure was valued at $100 million, what is the daily VaR at the confidence level of 99% (one-sided) of that position when the daily volatility is 1% (round to the nearest thousand dollars)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Mergers Acquisitions And Other Restructuring Activities

Authors: Donald DePamphilis

9th Edition

0128016094, 978-0128016091

More Books

Students also viewed these Finance questions