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Fram Compre

Compre paper

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62 views2 pages

Fram Compre

Compre paper

Uploaded by

Samar Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

K.K. BIRLA GOA CAMPUS


I SEMESTER (2023-24)
Course No. : FIN F414
Course Title : Financial Risk Analytics & Management
COMPRE EXAM
MAXIMUM MARKS: 40 Date: 07/12/2023
DURATION: 180 MINUTES Time: 2:00 - 5:00 PM
Instructions: (1) Make an Index of your answers in the Main Answer Book
Q.1. (a) The gamma of a delta-neutral portfolio is 30. Estimate what happens to the value
of the portfolio when the price of the underlying asset (a) suddenly increases by $2 and (b)
suddenly decreases by $2.

(b)The gamma and vega of a delta-neutral portfolio are 50 and 25, respectively, where the
vega is “per %.” Estimate what happens to the value of the portfolio when there is a shock
to the market causing the underlying asset price to decrease by $3 and its volatility to
increase by 4%. [2+3=5 Marks]

Q.2. (a) Suppose that an investor has shorted shares worth $5,000 of Company A and
bought shares worth $3,000 of Company B. The proportional bid–ask spread for Company
A is 0.01 and the proportional bid–ask spread for Company B is 0.02. What does it cost the
investor to unwind the portfolio?

(b) Suppose that in problem 2(a) the bid–ask spreads for the two companies are normally
distributed. For Company A the bid–ask spread has a mean of 0.01 and a standard deviation
of 0.01. For Company B the bid–ask spread has a mean of 0.02 and a standard deviation of
0.03. What is the cost of unwinding that the investor is 95% confident will not be
exceeded?[Hint: the corresponding z-score is 1.645] [2+3=5 Marks]

Q.3. (a) Consider a position consisting of a $300,000 investment in gold and a $500,000
investment in silver. Suppose that the daily volatilities of these two assets are 1.8% and
1.2%, respectively, and that the coefficient of correlation between their returns is 0.6. What
are the 10-day 97.5% VaR and ES for the portfolio? By how much does diversification
reduce the VaR and ES? [Hint: N-1(0.975)=1.96]

(b) Explain how the terms risk weights and risk sensitivity are used in connection with the
model-building approach. [3+2=5 Marks]

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Q.4. (a) Suppose we are interested in estimating 99th percentile of a loss distribution from
500 observations so that 𝑛 = 500 and 𝑞 = 0.99 using historical simulation approach.
Assume that a normal distribution is chosen as the standard distribution with mean and
standard deviation are zero and $10 million, respectively. With f(x) value given to be
0.0027, as an estimate of the probability density function of the loss evaluated at x, if the
estimate of the 99th percentile using historical simulation is $25 million, then calculate a
95% confidence interval of a VaR estimate, given that the z-score is 1.96.

(b) Suppose the VaR confidence level had been 95% instead of 99%, as given in problem
4(a), then the corresponding f(x) value given to be 0.0103. In this case, what will be new
value of the standard error of a VaR estimate?

(c) Now, suppose the sample size is increased from 500 to 2000 as given in problem 4(a),
then what will be the new value of the standard error of a VaR estimate? [3+1+1=5 Marks]

Q.5. A company has one- and two-year bonds outstanding, each providing a coupon of 8%
per year payable annually. The yields on the bonds (expressed with continuous
compounding) are 6.0% and 6.6%, respectively. Risk-free rates are 4.5% for all maturities.
The recovery rate is 35%. Defaults can take place half way through each year. Estimate the
risk-neutral default rate each year. [5 Marks]

Q.6. (a) Distinguish between real-world vs. risk-neutral default probabilities.

(b) Given that or a company with $100 of debt and a current market capitalization of $172.
Further, it is given that the implied volatility of the enterprise value is 40% and the risk-
free rate is 8.00%. Calculate the distance to default in standard deviations over one year.
[3+2=5 Marks]

Q.7.Write short notes on the following:

(a) Top-down Vs. bottom-up approaches to risk management.

(b) Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)

(c) Application of Vasicek’s Gaussian copula model for calculating default rate for a
portfolio of loans

(d) Liquidity funding risk [10 Marks]


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