Consider two traders - a Forex Trader & a Bond Trader. Each has returned a profit of Rs.10 Million over the last year. Forex trader used a notional amount of Rs.100 Million in a market with volatility of 12% per annum. While Bond trader used a higher notional amount of Rs. 200 Million, the volatility was lower at 4%. Answer all the subsections.     

                                                                                                                   

a.       Estimate the VAR measure for each trader at 99% level of confidence over a year 

 

b.       Calculate the Risk Adjusted Performance Measure for each trader.         

                                                                                         

c.       Currently both the traders are drawing a bonus of 20% of the profit they book. However, you want to revise the bonus for the trader based on the risk she is taking. 

Also, you set the benchmark risk at Rs.20 Million, which is provided for the profit of $10M. Benchmark earns old bonus of $2M. Cost of capital is 15%. Set up a bonus scheme that takes care of the risk level while keeping the total compensation still the same if the risk capital is equal to the benchmark. Under this bonus scheme what would 

 be the bonus each trader will be getting.