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A bank’s trading book is comprised of a bond portfolio worth $20 million and a stock portfolio worth $30 million in the spot market. The modified duration of the bond portfolio is five years, while the market beta of the stock portfolio is estimated as 1.2. The daily standard deviation is 0.1% for yield changes and 0.5% for equity index returns, and the correlation between daily yield changes and index returns is -0.5. Compute the daily value-at-risk based on a 1% tail loss probability for the stock and bond portfolios and aggregate these value-at-risk figures to determine the overall value-at-risk for the bank’s trading book.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92320638

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