Question
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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.
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jeff jeffy answered 1 year agoRelated Solutions
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A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
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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%
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10%
$.67
20%
$.69
70%
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Calculate the expected...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
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$.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...
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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
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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%
$.69
70%
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Calculate the expected...
A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...
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strike=$.68, premium=$.0096
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US
Switz.
Possible spot rate in 90 days
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Probability
90 day borrowing
rate
3.2%
3.2%
$.65
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$.67
20%
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