Wila is a risk-analyst at Deli Bank (DB), a commeroial bank with operations in Zambia. DB is currently expanding its operations to include proprietary trading and is reviewing its risk management policies. DB uses Value at Risk (VaR) models to monitor its risk exposures. DB's current portfolio of currencies contains only long positions. The volatility of the currencies in its portfolio has recently increased, and Wila expects volatility to remain high over the next several quarters. As a result, she has hedged the portfolio using currency options. Required: A. Explain Value at Risk as a measure of market risk and the key elements involved when interpreting VaR. B. Outline the three methods used to calculate VaR. C. For hedging purpose, the client is of the opinion that the delta normal method is the most appropriate method. Advise the client on the appropriateness of the method.
Wila is a risk-analyst at Deli Bank (DB), a commeroial bank with operations in Zambia.
DB is currently expanding its operations to include proprietary trading and is reviewing
its risk management policies. DB uses Value at Risk (VaR) models to monitor its risk
exposures.
DB's current portfolio of currencies contains only long positions. The volatility of the
currencies in its portfolio has recently increased, and Wila expects volatility to remain
high over the next several quarters. As a result, she has hedged the portfolio using
currency options.
Required:
A. Explain Value at Risk as a measure of market risk and the key elements involved
when interpreting VaR.
B. Outline the three methods used to calculate VaR.
C. For hedging purpose, the client is of the opinion that the delta normal method is
the most appropriate method. Advise the client on the appropriateness of the
method.
D. Consider a position consisting of a K200,000 investment in Asset A and a
K300,000 investment in Asset B. Assume that the daily volatilities of the assets
are 1.5% and 1.8% respectively, and that the coefficient of
their returns is 0.4. What is the five day 95% Value at Risk (VaR) for the portfolio
(95% confidence level represents 1.65 standard deviations on the left side of a
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