Transcript The Value of Money

Risk Management
Exercises
Exercise
Value at Risk calculations
Problem
Consider a stock S valued at $1 today, which after
one period can be worth ST: $2 or $0.50.
Consider also a convertible bond B, which after one
period will be worth max(1, ST).
Determine which is the following three portfolios
has lower VaR:
1. B
2. B-S
3. B+S
FRM exam 1999
The VaR of one asset is 300, and another one is
500. If the correlation between changes in asset
prices is 1/15, what is the combined VaR?
1. 525
2. 775
3. 600
4. 700
Exercise
Hedging
Problem
Consider a stock S valued at $1 today, which after
one period can be worth ST: $2 or $0.50.
Consider also a convertible bond B, which after one
period will be worth max(1, ST).
Determine the optimal trading strategy adding a
stock portfolio to the bond.
Exercise
Credit risk
Problem
Consider a stock S valued at $1 today, which after
one period can be worth ST: $2 or $0.50.
Consider also a convertible bond B, which after one
period will be worth max(1, ST).
Assume the stock can default, after which event
ST=0.
Determine which is the following three portfolios
has lower Credit-VaR:
1. B
2. B-S
3. B+S