Task-5 (10 Marks)

You are an investment analyst in a chosen financial institution. The financial institution has the following investments as of 31 December 2019:

Equity investment of AUD 150 million (This investment mirrors the return of the S&P/ASX All Ordinaries Index)

Investment in 5-year Commonwealth government securities (CGS) of AUD 100 million

Investment in the Certificate of Deposit issued by Deutsche Bank in Germany of 25 million euro.

You need to use 5 year data to calculate the risk measure of each investment. Data can be accessed using the following links

ASX all ordinaries: https://au.finance.yahoo.com/quote/%5EAORD/history?period1=1441756800&period2=1599609600&interval=1mo&filter=history&frequency=1mo

5-year Commonwealth government securities: https://www.rba.gov.au/statistics/tables/#interest-rates (Use Capital Market Yields-Government Bonds-Monthly)

Exchange rates: https://www.rba.gov.au/statistics/historical-data.html?v=2020-09-09-12-08-03#exchange-rates

Required:

a)(2 Marks) Calculate the 1-day equity VaR of the financial institution as of 31December 2019, using the variance-covariance method at 1% significance.

b)(2 Marks) Calculate the 10-day fixed income VaR using interest rates as of 31 December 2019, using the variance-covariance method at 1% significance.

c)(2 marks) Calculate the 20-day foreign exchange VaR of the financial institution as of 31 December 2019, using the variance-covariance method at 1% significance.

d)(2 marks) Calculate the 10-day portfolio VaR of the financial institution as of 31 December 2019, using the variance-covariance method at 1% significance. The portfolio VaR should be computed using equity, fixed income, and foreign exchange positions of the financial institution.

e)(2 mark) What are the limitations of VaR estimate? What alternative risk measurement method you can propose to overcome the limitations of VaR method.