VaR

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

VaR

Postby suresh.wadhwani2009 » Sun Apr 29, 2012 8:21 pm

Pls explain:

Consider the following single bond of $10 million, a modified duration of 3.6 yrs and annualized yield of 2% and annual standard deviation of 3%; Using the duration method and assuming that the daily return on the bond position is independently identically normally distributed, calculate the 10 day holding period VaR of the position with a 99% confidence interval, assuming there are 252 days in a year.
Choose one answer.
a. 334,186
b. 699, 000
c. 139240
d. 144840

Pristine Solution: The correct answer is 334,186. VAR = $10,000,000* 0.02*3.6* [sqrt10/ (sqrt252)]* 2.33 = $334,186

Why they have multiplied with annualized yield instead of annual std deviation?? :(

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: VaR

Postby content.pristine » Tue May 01, 2012 12:37 pm

Hi Suresh,

This question deals with bonds. The measure of risk in bonds is given by Duration * change in yields.. The standard deviation here is not relevant. In fact, it is wrong :?
Standard deviation should be Duration * Change in yields.

Remember, VaR for a Bond Portfolio is:
z * Market Value * Duration * Change in yields for the period..

Here, since annual yield change is given, then it needs to be unannualized.

Hope this helps 8-)

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: VaR

Postby suresh.wadhwani2009 » Wed May 02, 2012 9:35 am

Thanks!


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