Need help with parts of question 2

) Using the Ken French daily data on the market risk premium Rm-Rf back to 1926 posted in UBLearns), sort the returns and estimate the standard deviation.

(b) Using the history of sorted actual returns, find (i) the 1 day 95% VAR for the market risk premium and (ii) the 1 day 99.5% VAR for the market risk premium

(c) Find the 21 trading day 95% VAR and 99.5% VAR

(d) Using your estimate from part (a) for the std dev and assuming a mean of 0, what is the 21 trading day 95% VAR and 99.5% VAR using the normal distribution as the model for stock returns? (hint: for the 95%VAR use (.05,0,std dev) find the 1 day VAR)

(e) Why are (c) and (d) different? Which is more accurate?

ASSIGNMENT 1 MGF 407 Financial Derivatives Spring 2017 You may work in a group of up to 4 on this Assignment. Please indicate clearly on your Assignment who the members of the group are. Please note, all assignments submitted with more than 4 group members will automatically receive a 0 grade. This Assignment is due on Tuesday, February 21st at the beginning of class. You may also submit the assignment by email to dmohr@buffalo.edu before the deadline. No late assignments will be accepted. ________________________________________________________________________________________________________ 1. ABC bond has a par value of $1,000 and pays a 6% coupon semi-annually. There are 4 years remaining until maturity. (a) What is the price if the yield to maturity is 5% and the bond price is calculated using semi-annual compounding? (b) What is the price of the bond if the bond price is calculated using continuous compounding and a 5% continuous yield? 2. (a) Using the Ken French daily data on the market risk premium Rm-Rf back to 1926 posted in UBLearns), sort the returns and estimate the standard deviation. (b) Using the history of sorted actual returns, find (i) the 1 day 95% VAR for the market risk premium and (ii) the 1 day 99.5% VAR for the market risk premium (c) Find the 21 trading day 95% VAR and 99.5% VAR (d) Using your estimate from part (a) for the std dev and assuming a mean of 0, what is the 21 trading day 95% VAR and 99.5% VAR using the normal distribution as the model for stock returns? (hint: for the 95%VAR use =norminv(.05,0,std dev) find the 1 day VAR) (e) Why are (c) and (d) different? Which is more accurate? 3. You would like to enter a short position in the March 2017 E-mini S&P 500 Futures contract at the CME futures market. Find the initial margin and maintenance margin from the CME website and answer the following: (a) How much cash (including margin) is required to enter 10 short futures contracts? (b) If the S&P 500 goes down to 2000, what is your profit? (c ) After you purchase your position, assume the next 10 days closing prices for the S&P are 2300, 2320, 2210, 2250, 2230, 2190, 2210, 2240, 2200, 2180. For each day, calculate the cash flow required each day to settle up on the 10 contracts. (Note: if you drop below the maintenance margin, you will have a margin call where you have to add cash to bring your balance back to the initial margin). (d) show that your result in (c) is the same as you would get if you held an equivalent position in forward contracts and closed the position after 10 days at a price of 2180