Question

1. A positive gamma portfolio tends to have a (~~) left tail than the normal distribution. If the distribution of AP is normal, the calculated VaR tends to be().

I heavier   II less heavy     III too high     IV too low

A. I, III        B. II, III             C.II, IV

2. Consider a portfolio consisting only of stock Alpha. Stock Alpha has a market value of $635,000 and an annualized volatility of 20%. Calculate the VaR assuming normally distributed returns with a 99% confidence (N°¹(0.01) = -2.326) interval for a 10-day holding period and 252 business days in a year. The daily return is assumed to be zero. ()

A. $56,225

B.$69,420

C.$82,525

3. What is the lower pricing bound for a European call option with a strike price of 80 and one year until expiration? The price of the underlying asset is 90,and the 1-year interest rate is 5% per annum. Assume continuous compounding of interest. ()

A.13.9

B.10.00

C.5.90

Answer 1

1.

Note the following:

• A positive gamma portfolio tends to have a less heavy left tail than the normal distribution.
• If the distribution of Delta P is normal, the calculated VaR tends to be too high.

 

Hence, the correct answer is option (B).

 

2.

VaR = Annualized volatility / sqrt (N) x sqrt (n) x V x N-1(0.01) = 205 / (252)1/2 x (10)1/2 x 635,000 x 2.326 = 56,225

Hence, the correct answer is option (A).

 

3.

Lower bound = S0 - Ke-rt = 90 - 80 x e(-5% x 1) = 13.90

Hence, option (A) is right option.

1. Hence, the correct answer is option (B).

2. Hence, the correct answer is option (A).

3. Hence, option (A) is right option.