Chapter 20

The volatility of SBN company is 1.5% per day and the size of the position is $6 million. Assuming that the change is normally distributed, find a one-day 97% VaR and 10-day 90% VaR.

Consider a portfolio consisting of $4 million invested in Stock Fund and $6 million in Bond Fund. The daily volatility of Stock Fund is 1% and the daily volatility of Bond Fund is 2%. The correlation coefficient between two funds is -0.4 and they are normally distributed.

a) Find the 10-day 99% VaR.

b) Find the diversification benefit.

Chapter 24

Explain weather derivatives and energy derivatives.

Suppose that you buy a weather call option with strike price = 200 based on HDD because you are concerned about unexpectedly cool weather in summer. The payment rate on the option contract is $1,000 and the payment cap is $200,000.

a) If the cumulative HDD = 320, what is your payoff?

b) If the cumulative HDD = 450, what is your payoff?

Standard deviation was not given by teacher.