Question
In: Finance
First Life Insurance has the following securities in its portfolio: Swiss Francs worth SF10 million in...
First Life Insurance has the following securities in its portfolio: Swiss Francs worth SF10 million in foreign exchange and $20 million in a well-diversified mutual fund of stocks. First Life uses a 99% percent one-tailed distribution to measure value-at-risk (2.33).
2a. If the current exchange rate is SF1.45/$ and the average volatility of returns of Swiss Francs, as measured by its standard deviation, is 15 basis points, what is the Daily Earnings at Risk (DEAR)?
2b. If the average market volatility of the returns of stocks, σm, is 20 basis points, what is the Daily Earnings at Risk (DEAR) for its investment in the mutual fund?
2c. If the correlation coefficient between returns of Swiss Francs and the mutual funds is 0.2, what is the DEAR of First Life's total portfolio?
2d. What correlation coefficient would make DEAR of the combined portfolio not any different from the sum of the individual DEARs of the Swiss Francs and stock portfolios? Explain your answer.
Solutions
Expert Solution
SEE THE IMAGE. ANY DOUBTS,
FEEL FREE TO ASK. THUMBS UP PLEASE
jeff jeffy answered 1 year agoRelated Solutions
Raton is a U.S. Company that has net inflows of 80 million Swiss francs and net...
Raton is a U.S. Company that has net inflows of 80
million Swiss francs and net outflows of 60 million British pounds.
The present direct exchange rate of the Swiss franc is $1.05/1Swiss
franc while the present direct exchange rate of the pound is $1.31.
Raton has not hedged these positions. The Swiss franc and British
pound are highly correlated in their movements against the dollar.
Explain whether Raton will be favorably or adversely affected if
the dollar weakens against...
An investment fund has the following assets in its portfolio: $52 million in fixed-income securities and...
An investment fund has the following assets in its portfolio:
$52 million in fixed-income securities and $52 million in stocks at
current market values. In the event of a liquidity crisis, it can
sell its assets at a 91 percent discount if they are disposed of in
two days. It will receive 93 percent if disposed of in four days.
Two shareholders, A and B, own 5 percent and 7 percent of equity
(shares), respectively.
a.
Market uncertainty has caused...
Consider a mutual fund that manages a portfolio of securities worth $210 million. Suppose the fund...
Consider a mutual fund that manages a portfolio of securities
worth $210 million. Suppose the fund owes $5 million to its
investment advisers and another $4 million for rent, wages due, and
miscellaneous expenses. The fund has 5 million shares outstanding.
Net asset value?
enCo has the following securities in its investment portfolio on December 31, 2014. All these securities...
enCo has the following securities in its investment portfolio on
December 31, 2014. All these securities were purchased in 2014.
800 shares of Benson Inc. common shares, which cost $50,400 and
had a fair value of $52,300 at the end of 2014. JenCo accounts for
this investment as available for sale.
3,000 shares of Southgate Inc. common stock, which cost
$174,000 and had a fair value of $204,000 at the end of 2014. JenCo
accounts for this investment as available...
Vaughn Company has the following securities in its investment portfolio on December 31, 2017 (all securities...
Vaughn Company has the following securities in its investment
portfolio on December 31, 2017 (all securities were purchased in
2017): (1) 3,100 shares of Anderson Co. common stock which cost
$55,800, (2) 9,600 shares of Munter Ltd. common stock which cost
$547,200, and (3) 6,100 shares of King Company preferred stock
which cost $250,100. The Fair Value Adjustment account shows a
credit of $10,900 at the end of 2017. In 2018, Vaughn completed the
following securities transactions. 1. On January...
A US company has ordered watches from Switzerland that will require a payment of Swiss francs...
A US company has ordered watches from Switzerland that will
require a payment of Swiss francs (CHF) 500,000 in three months.
The expected spot prices to prevail in three months range from
$1.00 to $1.12. The following information is available:
Spot rate $1.06/CHF
3-month forward rate $1.07/CHF
Interest rate in US5.00%
Interest rate in Switzerland2.00%
Call option premium$0.040E=$1.06
Put Optionpremium$0.045E=$1.06
How can the firm hedge using forward rates? Show the payoffs
for the expected spot rates.
How can the firm...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days.
The current spot rate is $.6698/SFr and the 90 day forward rate is
$.6776/SFr.
90 day call option on SFr:
strike=$.68, premium=$.0096
90 day put option on SFr:
strike=$.68, premium=$.0105
Interest
rates
US
Switz.
Possible spot rate in 90 days
90 day deposit
rate
3%
3%
Spot
Probability
90 day borrowing
rate
3.2%
3.2%
$.65
10%
$.67
20%
$.69
70%
______________________________________________________________________
Calculate the expected...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days.
The current spot rate is $.6698/SFr and the 90 day forward rate is
$.6776/SFr.
90 day call option on SFr:
strike=$.68, premium=$.0096
90 day put option on SFr:
strike=$.68, premium=$.0105
Interest
rates
US
Switz.
Possible spot rate in 90 days
90 day deposit
rate
3%
3%
Spot
Probability
90 day borrowing
rate
3.2%
3.2%
$.65
10%
$.67
20%
$.69
70%
______________________________________________________________________
Calculate the expected...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days.
The current spot rate is $.6698/SFr and the 90 day forward rate is
$.6776/SFr.
90 day call option on SFr:
strike=$.68, premium=$.0096
90 day put option on SFr:
strike=$.68, premium=$.0105
Interest
rates
US
Switz.
Possible spot rate in 90 days
90 day deposit
rate
3%
3%
Spot
Probability
90 day borrowing
rate
3.2%
3.2%
$.65
10%
$.67
20%
$.69
70%
______________________________________________________________________
Calculate the expected...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days.
The current spot rate is $.6698/SFr and the 90 day forward rate is
$.6776/SFr.
90 day call option on SFr:
strike=$.68, premium=$.0096
90 day put option on SFr:
strike=$.68, premium=$.0105
Interest
rates
US
Switz.
Possible spot rate in 90 days
90 day deposit
rate
3%
3%
Spot
Probability
90 day borrowing
rate
3.2%
3.2%
$.65
10%
$.67
20%
$.69
70%
______________________________________________________________________
Calculate the expected...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- XYZ Company is considering purchasing a piece of equipment costing $400,000. It has a useful life...
- Reflection of the short film "How Wolves Change Rivers" and Aldo Leopold's "Thinking Like A Mountain".
- What kind of rebar would be most cost effective for foundation? Would it be to design...
- Why would UnderArmour want to be sure that consumers can clearly see different models ( about...
- Five years ago, Miguel invested a stock with price $35 per share. The stock price at...
- You are touring a distant planet on which the magnitude of the gravitational acceleration is 65%...
- GDP increased from $16.55 trillion to $17.28 trillion. What was the growth rate of GDP? The...
ADVERTISEMENT