A financial institution owns a portfolio of options dependent on the US dollar–sterling exchange rate. The...

A financial institution owns a portfolio of options dependent on the US dollar–sterling exchange rate. The delta of the portfolio with respect to percentage changes in the exchange rate is 6.1. If the daily volatility of the exchange rate is 0.5% and a linear model is assumed.

The estimated 10-day 99% VaR is $ .

Solutions

Expert Solution

The approximate relationship between the daily change in the portfolio value, ΔP, and the daily change in the exchange rate, ΔS, is

ΔP = 6.1ΔS

The standard deviation of Δx equals the daily volatility of the exchange rate, or 0.5%.

The standard deviation of ΔP is therefore

6.1 * 0.005 = 0.0305

It follows that the 10-day 99 percent VaR for the portfolio is

= 0 0305 * 2.33 * (10)^1/2 = 0.2247

jeff jeffy answered 1 year ago

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