Question 140: Textbook

The local bank that you are a risk manager has a portfolio of options on a traded asset. The delta of the options is -30 and the gamma is -5. (Do not use excel, and show all the workings)

a) The asset price is 20 and its daily volatility is 1%. Use the quadratic model to calculate the first three moments of the change in the portfolio value.

b) Calculate a one-day 99% Value at Risk using the first two moments.

c) From your answer to point ii above, what can you say about the third moments impact on value at risk calculation?

d) Calculate a one-day 99% Value at Risk using all three moments.