An analyst gathered the following information on two assets: Asset A Current daily volatilities 2.20% Prices at close of business yesterday R53 Prices at close of business today R54 Asset B 1.60% R33 R34 The estimate of coefficient of correlation between the returns of the two assets was 0.25 and the covariance 0.000088. The parameter 1 used in the EWMA model is 0.95. If the prices of the assets at close of trading are R54 and R34, the new covariance estimate between the two assets is 0.000112 and the new variance estimate for Asset A and Asset B is 0.000478 and 0.000289, respectively. 2.5 The analyst has asked you to update the correlation estimate between the two assets, taking the trading prices of the assets today into consideration. (8) A fund manager announces that the fund's 3-month 99% VaR is 7.9% of the size of the portfolio being managed. You have an investment of R1,200,000 in the fund. How do you interpret the portfolio manager's announcement? (3) Describe two ways of handling interest-rate-dependent instruments when the model- building approach is used to calculate VaR. (2) 2.6 2.7 A financial institution owns a portfolio of options dependent on the US dollar-sterling exchange rate. The delta of the portfolio with respect to percentage changes in the exchange rate is 8.7. If the daily volatility of the exchange rate is 0.6% and a linear model is assumed, calculate the estimated 10-day 95% VaR for the portfolio. (4) 2.8 Explain why it is important for organisations to monitor risks when derivatives are used.