N1569 Financial Risk Management Seminar Topic 5 Equity VaR
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Financial Risk Management (N1569)
Seminar Topic 5 Equity VaR
Use the Excel file for this seminar to answer the following questions:
1. A portfolio contains cash positions of $1m, $2m and $3m on three stocks named A, B and C respectively. The stocks A, B and C have market betas of 0.6, 1, and 1.2 respectively, with respect to an index whose excess returns are i.i.d. and normally distributed with expectation 2.5% and volatility 35% per annum. Calculate the 10% 5-day Equity VaR of the portfolio.
2. A UK investor buys s1 million of UK stocks in a portfolio with beta 1.2 with respect to the UK market index, and s2 million of US stocks in a portfolio with beta 0.8 w.r.t. with respect to the US market index.
Suppose the FTSE 100, S&P 500 and £/$ volatilities are 15%, 10% and 35% respectively, and their correlations are:
%UK − US = 0.7, %UK − £/S = 0.4 and %US − £/S = 0.5.
Calculate the VaR due to each market risk factor and then aggregate this into (a) the equity VaR and (b) the total systematic VaR.
For each VaR figure apply the normal linear model and use 99% confidence (i.e. α = 1%) and h = 10 days for the risk horizon. Express all your answers in $.
2024-01-15