Case
financial risk management
- Course
- Institution
financial risk management
[Show more]
Seller
Follow
1097434525U
Content preview
MANG 6020 Financial Risk ManagementSeminar 6
Question 1
Suppose that a one-day 97.5% VaR is estimated as $13 million from 2,000 observations. The
one-day changes are approximately normal with mean zero and standard deviation $6 million.
Estimate a 99% confidence interval for the VaR estimate.
Solution:
The standard error is
where f(q) is an estimate of the loss probability density at the VaR point. In this case the 0.975
point on the approximating normal distribution is NORMINV(0.975,0,6) = 11.76. f(q) is
estimated as NORMDIST(11.76,0,6,FALSE) = 0.0097. The standard error is therefore
A 99% confidence interval for the VaR is 13 − 2.576 × 0.358 to 13 + 2.576 × 0.358, or 12.077 to
13.923.
Question 2
Based on a 90% confidence level, how many exceptions in backtesting a VAR would be
expected over a 250-day trading year?
Solution:
This is p × T = 10% × 250 = 25.
Question 3
A large, international bank has a trading book whose size depends on the opportunities perceived
by its traders. The market risk manager estimates the one-day VAR, at the 95% confidence level,
to be USD 50 million. You are asked to evaluate how good a job the manager is doing in
estimating the one-day VAR. Which of the following would be the most convincing evidence
that the manager is doing a poor job, assuming that losses are identical and independently
distributed (i.i.d.)?
a. Over the past 250 days, there are eight exceptions.
b. Over the past 250 days, the largest loss is USD 500 million.
c. Over the past 250 days, the mean loss is USD 60 million.
d. Over the past 250 days, there is no exception.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller 1097434525U. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $4.20. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
79271 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now