Calculate the DEAR of each asset (fixed income, foreign exchange and equities assets) and the trading portfolio at 90% confidence level.
Problem 4: Market Risk - Calculating Dear (Daily Earning at Risk) on an FI's Trading Portfolio (27% An FI wants to obtain the DEAR on its trading portfolio which consists of the following securities. Fixed-income securities: i) The FI has a $1.5 million position in a six-year zero bonds with a face value of $1,543,302. The bond is trading at a yield to maturity of 7.50%. The historical mean change in daily yields is 0.0 percent, and the standard deviation is 33 basis points (i.e. 0.33%). ii) The FI also holds a 12-year zero bond with a face value of $1,000,000. The bond is trading at a yield to maturity of 7.56%. The potential adverse move in yields is 65 basis points (i.e. 0.65%). Foreign exchange contracts: The FI has a 4 million long trading position in spot euros at the close of business on a particular day. The exchange rate is 1.40/$1, or $0.714286/, at the daily close. Looking back at the daily changes in the exchange rate of the euro to dollars for the past year, the FI finds that the volatility or standard deviation (0) of the spot exchange rate was 55.5 basis points (bp) (i.e. 0.555%). Equities: The FI holds a $3 million trading position in stocks that reflect the U.S. stock market index (e.g., the S&P 500). The B = 1. Over the last year, the standard deviation of the stock market index was 175 basis points (i.e. 1.75%). Correlations (R) among Assets Six-year zero-coupon 12-year zero-coupon / $ U.S. stock index .45 Six-year, zero-coupon 12-year, zero-coupon /$ U.S. stock index 4 .225 14 .225 Calculate the DEAR of each asset (fixed income, foreign exchange and equities assets) and the trading portfolio at 90% confidence level. Problem 4: Market Risk - Calculating Dear (Daily Earning at Risk) on an FI's Trading Portfolio (27% An FI wants to obtain the DEAR on its trading portfolio which consists of the following securities. Fixed-income securities: i) The FI has a $1.5 million position in a six-year zero bonds with a face value of $1,543,302. The bond is trading at a yield to maturity of 7.50%. The historical mean change in daily yields is 0.0 percent, and the standard deviation is 33 basis points (i.e. 0.33%). ii) The FI also holds a 12-year zero bond with a face value of $1,000,000. The bond is trading at a yield to maturity of 7.56%. The potential adverse move in yields is 65 basis points (i.e. 0.65%). Foreign exchange contracts: The FI has a 4 million long trading position in spot euros at the close of business on a particular day. The exchange rate is 1.40/$1, or $0.714286/, at the daily close. Looking back at the daily changes in the exchange rate of the euro to dollars for the past year, the FI finds that the volatility or standard deviation (0) of the spot exchange rate was 55.5 basis points (bp) (i.e. 0.555%). Equities: The FI holds a $3 million trading position in stocks that reflect the U.S. stock market index (e.g., the S&P 500). The B = 1. Over the last year, the standard deviation of the stock market index was 175 basis points (i.e. 1.75%). Correlations (R) among Assets Six-year zero-coupon 12-year zero-coupon / $ U.S. stock index .45 Six-year, zero-coupon 12-year, zero-coupon /$ U.S. stock index 4 .225 14 .225 Calculate the DEAR of each asset (fixed income, foreign exchange and equities assets) and the trading portfolio at 90% confidence level
