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31 views13 pages

On BT

ON-BT

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Thúy An Trần Thị
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Ôn BT QTRR

Suppose that each of two investments has a 4% chance of a loss of $10 million, a
2% chance of a loss of $1 million, and a 94% chance of a profit of $1 million. They
are independent of each other.
• (a) What is the VaR for one of the investments when the confidence level is 95%?
• (b) What is the expected shortfall when the confidence level is 95%?
• (c) What is the VaR for a portfolio consisting of the two investments when the
confidence level is 95%?
• (d) What is the expected shortfall for a portfolio consisting of the two
investments when the confidence level is 95%?
• (e) Show that, in this example, VaR does not satisfy the subadditivity condition,
• whereas expected shortfall does.
(a) What is the VaR for one of the investments when the confidence
level is 95%?
95% VaR is 1M.
2% loss
1M
4% loss 10M

96% 94%
95%
(b) What is the expected shortfall when the confidence level is 95%?
We are calculate 5% expected shortfall of tail.
Within 5% tail, we have 4% loss of 10M (80%) and 1% loss of 1M(20%). Therefore,
ES = 0.8x10M + 0.2x1 = 8.2M

2% loss
1M
4% loss 10M

96% 94%
95%
4/5% = 80% 1/5% = 20%
5% tail
(c) What is the VaR for a portfolio consisting of the two investments when the confidence level is 95%?
For a portfolio consisting of the two investments
There is a 0.04 × 0.04 = 0.0016 chance that the loss is $20 million;
There is a 2 × 0.04 × 0.02 = 0.0016 chance that the loss is $11 million;
There is a 2 × 0.04 × 0.94 = 0.0752 chance that the loss is $9 million;
There is a 0.02 × 0.02 = 0.0004 chance that the loss is $2 million;
There is a 2 × 0.2 × 0.94 = 0.0376 chance that the loss is zero;
There is a 0.94 × 0.94 = 0.8836 chance that the profit is $2 million.
It follows that the 95% VaR is $9 million. 0.0016 + 0.0016 + 0.0468 (0.05- 0.0016 - 0.0016)
0.0468

0.0016 0.0752 of
0.0016 0.05 loss 9M 0.0376 0.8836
0.0004 Zero loss
Loss 2M

5% tail
d) The expected shortfall for the portfolio consisting of the two investments is the expected loss conditional that the loss is in
the 5% tail. Given that we are in the tail, there is a 0.0016/0.05 = 0.032 chance of a loss of $20 million, a 0.0016/0.05 = 0.032
chance of a loss of $11 million; and a 0.936 chance of a loss of $9 million. The expected loss is therefore $9.416.

𝐸𝑆=( 0.032× 20 𝑀 )+(0.032 ×11 𝑀 )+(0.936 × 9 𝑀 )=9.416 𝑀

0.0016/0.05 0.0016/0.05 0.0468/0.05


=0.0032 =0.0032 =0.936

0.0016 0.0016 0.0468

0.05
• (e) Show that, in this example, VaR does not satisfy the subadditivity
condition, whereas expected shortfall does.

VaR does not satisfy the subadditivity condition because 9 > 1 + 1.


However, expected shortfall does because 9.416 < 8.2 + 8.2.
• Suppose that a trader has bought some illiquid shares. In particular,
the trader has 100 shares of A, which is bid $50 and offer $60, and
200 shares of B, which is bid $25 and offer $35. What are the
proportional bid–offer spreads? What is the impact of the high bid–
offer spreads on the amount it would cost the trader to unwind the
portfolio? If the bid–offer spreads are normally distributed with mean
$10 and standard deviation $3, what is the 99% worst-case cost of
unwinding in the future as a percentage of the value of the portfolio?
• What are the proportional bid–offer spreads?
Share A:
• Bid – offer spread = offer price – bid price = $60 - $50 = $10

s(Proportional bid-offer spreads) =


• What are the proportional bid–offer spreads?
Share B:
• Bid – offer spread = offer price – bid price = $35 - $25 = $10

s(Proportional bid-offer spreads) =


• S còn gọi là liquidity risk
• What is the impact of the high bid–offer spreads on the amount it would cost the
trader to unwind the portfolio.
• Cost to unwind:
Mid market value of A = $55 x 100 = $5500
Mid market value of B = $3 x 200 = $6000
Cost to unwind :
=
=

Đây là normal case.


If the bid–offer spreads are normally distributed with mean $10 and
standard deviation $3, what is the 99% worst-case cost of unwinding in
the future?
99% worst case  z = 2.33
= $97,692.5

This is worst case : $97,692.5


Bài này thử giải 1 mình
• . Liquidity risk
• - Product X: Buy 25M – Sell 35M
• Market price
• - Product Z: Buy 23M – Sell 36M
• Market price
a) Calculate liquidity risk between above 2 products?
b) calculate liquidation risk in current market status?
c) Calculate liquidation risk in WORST CASE (VaR 95%)? Given the historical
record of the previous 6 months are as following: 15%, 18%, 24%, 21%, 16%,
10%.

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