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a). You are a UK company with an inventory of 1000 barrels of crude oil which is priced in US dollars. The current spot price
a). You are a UK company with an inventory of 1000 barrels of crude oil which is priced in US dollars. The current spot price of oil is Soil = 70 $/barrel and the current sterling-USD exchange rate is 1.7 USD per GBP (Sex= 0.5882 GBP per USD). The daily volatility of oil prices is 2% per day and the daily volatility of the exchange rate is 0.5% per day. Oil prices and the USD exchange rate are negatively correlated, with p = -0.1. Explain how you calculate the VaR in sterling () over 25-days (using the variance-covariance method) and any sources of error in the calculation. Briefly explain the difference between the VaR and the 'worse case VaR'. b). You hold 1000 plain vanilla calls on stock-A and have written 500 puts on stock-B and have access to 10 years of daily data on the stock prices A and B. The call premium and put premiums are Co = $10 and Po = $8. Explain the relative advantages and disadvantages of using either Monte Carlo Simulation (MCS) or bootstrapping in estimating the 5-day VaR (at the 5th percentile). a). You are a UK company with an inventory of 1000 barrels of crude oil which is priced in US dollars. The current spot price of oil is Soil = 70 $/barrel and the current sterling-USD exchange rate is 1.7 USD per GBP (Sex= 0.5882 GBP per USD). The daily volatility of oil prices is 2% per day and the daily volatility of the exchange rate is 0.5% per day. Oil prices and the USD exchange rate are negatively correlated, with p = -0.1. Explain how you calculate the VaR in sterling () over 25-days (using the variance-covariance method) and any sources of error in the calculation. Briefly explain the difference between the VaR and the 'worse case VaR'. b). You hold 1000 plain vanilla calls on stock-A and have written 500 puts on stock-B and have access to 10 years of daily data on the stock prices A and B. The call premium and put premiums are Co = $10 and Po = $8. Explain the relative advantages and disadvantages of using either Monte Carlo Simulation (MCS) or bootstrapping in estimating the 5-day VaR (at the 5th percentile)
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