Consider a portfolio with two foreign currencies, Canadian dollar and euro. These two currencies are uncorrelated and have a volatility against the dollar of 5% and 12% respectively. The portfolio has $2 million invested in CAD and $1 million in Euro. What is the portfolio VAR at 95% confidence level?
A firm’s current cash flows have a volatility of $60 million. A new project will have cash flows with a volatility of $20 million. The correlation coefficient between the two sets of cash flows is 0.3. Calculate the combined volatility and cash flow at risk at 95% confidence level.
A trader has an allocation equal to 8% of the firm’s capital. The returns of this unit have a beta with respect to the overall returns of 0.9. The firm’s daily VAR is $120 million. What should be the VAR allocated to the trader’s unit?
Some time back, a company entered into a forward contract to buy £ 1 million for $1.5 million. The contract now has 6 months to maturity. The daily volatilities are:
6 month zero coupon sterling bond : .06%
6 month zero coupon dollar bond : .05%
The correlation between the returns of the two bonds is 0.8. The current exchange rate is 1.53. What is the standard deviation of the daily change in value of the forward contract? What is the 10 day 99% VAR? Assume the 6 month interest rates in both sterlings and dollars is 5% per annum with continuous compounding.