FIN 4100 Management of Financial Institutions Fall 2019 Assignment 1 – market risk analysis Due: October 4, 2019 You may work individually or with one other person on this assignment. Please show enough of your work that I can determine how you obtain your answers. E.g, turn in the spreadsheet you use to do the calculations (excel spreadsheets only, CSV spreadsheets do not retain equations). If you make assumptions other as indicated below, please state them clearly. Each question is worth 10 points. Part I. A financial institution holds assets 1-6 as follows. (Select values as indicated for the following assets held by a financial institution for trading) 1. Asset 1, a long position in a bond that makes semi-annual coupon payments and returns the principal at maturity. The bond has (specify): a. a face value between 50 million and 100 million dollars, b. a maturity between 10 and 20 years, c. a coupon rate between 4% and 8%, and d. a yield to maturity different from the coupon rate but also between 4% and 8%. 2. Asset 2, a short position in a zero coupon bond that has (specify): a. a face value between 100 million and 200 million dollars, b. a maturity between 5 and 10 years, c. a yield to maturity between 4% and 8% 3a. Compute the value and modified duration of each assets from questions 1-2. b. Compute the value and modified duration of the financial institutions debt portfolio. 4. Asset 3, an equity portfolio that has (specify): a. a market value of the portfolio between 25 million and 50 million dollars, b. a beta between 0.75 and 1.75, but not 1.0. 5. Asset 4, Swiss francs: a. specify a short or long position, and b. specify the number of units of the foreign currency between 5 million and 15 million. 6a. Asset 5, British pounds: a. if the financial institution holds a long position in Swiss francs, the position in British pounds is short, and vice versa b. specify a number of British pounds between 5 million and 15 million. 7. Compute the dollar value of the financial institutions holdings of francs and of pounds. (Use the 9/20/2019 exchange rate from the data for assignment 1 file 8. Compute the total dollar value of the financial institutions portfolio of debt equity and foreign currency. Part 2. Use the daily interest rates (LIBOR), S&P 500 Index values, and exchange rates from the file: data for assignment 1, to answer the following relative to the assets in Part 1. Using the RiskMetrics model: 9. What are the daily earnings at risk (DEAR) values for each of the four assets (debt, equity, francs and pounds) when adverse movements are determined by RiskMetrics and the adverse price level is set at a 0.25% level? 10. What is the value at risk over 3 days for each asset using RiskMetrics if the adverse level is set at a 0.25% level? Using historic back simulation: 11. What are the daily earnings at risk (DEAR) values for each of the four assets (debt, equity, francs and pounds) when adverse price movements are determined using historic back simulation and the adverse price level is set at the 0.25% level? 12. What is the 3-day value at risk for each asset using back simulation if the adverse level is set at a 0.25% level? 13a. For one of the assets, explain what the DEAR values in questions 9 and 12 mean. b. For one of the assets, explain what the VAR values in questions 10 and 13 mean. Portfolio DEAR 14a. Using the RiskMetrics method, determine the daily earnings at risk (DEAR) for the financial institutions entire portfolio at the 0.25% level. b. Calculate the 3-day value at risk for the portfolio at the 0.25% level. 15. Using the back simulation method, determine the daily earnings at risk (DEAR) for the financial institutions entire portfolio 0.25% level. b. Calculate the 5-day value at risk for the portfolio at the 0.25% level.
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