Question

1. City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent. Suppose that during last year the mean change in daily yields on six-year zero-coupon bonds was 25 basis points, while the standard deviation was 30 basis points. Yield changes are assumed to be normally distributed (critical value = 1.96 for 95% confidence interval)

Question:  Continue from #1, what is the daily earnings at risk (DEAR) of this bond portfolio?

2. On December 31, 2001 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and SF 1.89/$.

(keep 4 decimal places in your computation)

Question: What is the value of delta in dollars for Japanese Yen position?

Answer 1

we need to find the volatility of the bond in $ first

the volatility of the bond is $ 0.06M

Daily earnings at risk for a 95% confidence level is

      

Volatility =0.06

Z value given =1.96

days    = for 1 day (daily)

               

                           = $ 0.1176 M

                            =$ 117,600