How do banks find out risk?
How would you find out a fair value of a call option? Describe with suitable exs and relevant models.
(a) You’re given two sets of data for Dodo Enterprises Ltd and Kestrel Flyers Ltd. The estimated total returns (TRs) are 26.3 and 11.6 percent correspondingly with standard deviations of 37.3 and 23.3 percent. The correlation coefficient between their returns is +0.15. Suppose weights of 0.5 each – 50 percent of investable funds to be placed in each security.
(i) Summarize the data in mathematical notation to facilitate calculation and denomination.
(ii) Compute the risk of this portfolio. On what term does the risk of the portfolio depend?
(iii) Supposing a correlation coefficient of +1, + 0.5, + 0.15, 0, -0.5, and -1.0, compute the portfolio risk under each of these scenarios.
(iv) Comment on the results.
(b) (i) Illustrate out what you understand by the term beta?
(ii) Demonstrate graphically the following beta: AΒ=1.5; BΒ=1.0; and CΒ=0.6
(iii) What is meant by volatile or aggressive security?
(iv) Interpret and comment on betas in the figure you illustrate in (ii) above.
The financial sector including the nonbank financial sector has grown in significance in Mauritius over the last decade and is a key growth sector. The Governor of the Bank of Mauritius states that Mauritius has sufficient liquidity and a robust system to shield itself from any financial crisis as has recently stormed USA. What is your opinion?