(a)Define Value-at-Risk (VaR).

(b)Interpret monthly 1%VaR = -0.25% for the exchange rate S(AUD/USD) returns.

(c)Show 1%VaR = -0.25% on a graph or chart assuming normality for returns.

(d)Using the data set below, calculate 1% daily VaR of an AUD $300 million position in US dollars. For this purpose, use the parametric approach. The z-value at 1% is -2.326.

Day AUD/USD

1 0.5324

2 0.5177

3 0.5642

4 0.5948

5 0.5521

6 0.5777

7 0.5135

(e) What are the key differences between parametric VaR approach and the historical VaR approach and what are the key assumptions that underlie each approach?