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QUESTION 3 Q3 (a) A company is in a forward contract to buy 1 million for $1.29 million. The contract now has six months to maturity, Daily volatility of a 6-month zero-coupon sterling bond (when its price is translated into dollars) is 0.06%. Daily volatility of a six-month zero-coupon dollar bond is 0.03%. The correlation coefficient between returns from the two bonds is 0.6. The current exchange is 1.2892 che The 6-month interest rate in both sterling and dollars is 3% per annum with continuous compounding. Calculate the standard deviation of the change in the dollar value of the forward contract in one day and the 10-day 99% VaR (value at risk). (11 marks) Q3 (b) Explain the regulatory role of the European Systemic Risk Board (ESRB) with reference to the principal instruments and objectives of macro-prudential policy. (10 % marks) rate Q3 (c) Describe the Central Bank of Ireland's approach to addressing systemic financial risk. (8 marks) Q3 (d) Explain the difference between correlation and covariance. (4 marks)