An Australian financial institution (FI) has a portfolio of assets consisting of stocks, foreign currencies, and...

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An Australian financial institution (FI) has a portfolio of assets consisting of stocks, foreign currencies, and loans. This financial institution holds a $15 million trading position in stocks that reflect the Australian stock market index. In 2019, the standard deviation of the daily returns on the Australian stock market index was 156 basis points. The Fl has 1.6 million long trading position in spot euros. The standard deviation of daily percentage changes in the /$ spot exchange rate was 62.5 basis points in 2019. The current spot exchange rate is 0.80/$1, or $1.25/ at the daily close. The individual daily earnings at risk (DEAR) for the loans held by the Fl was $500,000. The correlation coefficients (rij) between loans and foreign currencies, loans and stocks, and foreign currencies and stock are 0.20, 0.60, and 0.1, respectively. Required: a. Provide assistance to Jeffery Smith, the president of this Australian financial institution, to estimate the aggregate daily DEAR of his bank's portfolio of assets using adverse rate changes in the 95th percentile. (8 marks) b. Explain diversification in this situation. (2 marks) An Australian financial institution (FI) has a portfolio of assets consisting of stocks, foreign currencies, and loans. This financial institution holds a $15 million trading position in stocks that reflect the Australian stock market index. In 2019, the standard deviation of the daily returns on the Australian stock market index was 156 basis points. The Fl has 1.6 million long trading position in spot euros. The standard deviation of daily percentage changes in the /$ spot exchange rate was 62.5 basis points in 2019. The current spot exchange rate is 0.80/$1, or $1.25/ at the daily close. The individual daily earnings at risk (DEAR) for the loans held by the Fl was $500,000. The correlation coefficients (rij) between loans and foreign currencies, loans and stocks, and foreign currencies and stock are 0.20, 0.60, and 0.1, respectively. Required: a. Provide assistance to Jeffery Smith, the president of this Australian financial institution, to estimate the aggregate daily DEAR of his bank's portfolio of assets using adverse rate changes in the 95th percentile. (8 marks) b. Explain diversification in this situation. (2 marks)