Question
QUESTION 4 a) Robotic Co is a listed company on the New York Stock Exchange. Analysts are interested in evaluating its solvency risk. Robotic has
QUESTION 4 a) Robotic Co is a listed company on the New York Stock Exchange. Analysts are interested in evaluating its solvency risk. Robotic has the following information: Equity volatility = 0.19 per year N(d1) = 0.88 Market value of Equity = 500 million Market value of Assets = 980 million Short-term liabilities = 200 million Long-term liabilities = 250 million i) Using the KMV methodology, determine the distance-to-default for Robotic with the following formula. a = E*e /(VaN(d1)) and DD = (Va Default Point) / (Vaa) (12 marks) ii) Explain how Robotics distance-to-default is to be interpreted and understood. (8 marks) iii) Briefly discuss how KMVs usage of the market value of equity is better than using the book value of equity. (5 marks) b) i) A portfolio has annual returns which are normally distributed with mean 0.0% and standard deviation 15%. The current value of the portfolio is $100 million. Assuming that 1 year has 360 days, determine i. The 1-day 95% VaR for this portfolio? ii. The 14-day 95% VaR? iii. The 1-day 99% VaR for this portfolio? iv. The 21-day 99% VaR? (20 marks) ii) Briefly discuss why VaR may be an inaccurate estimate during a rare crisis such as the COVID pandemic. (5 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started