Q: Consider a position consisting of a $300,000 investment in
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 t...
See AnswerQ: Consider a portfolio of options on a single asset. Suppose that
Consider a portfolio of options on a single asset. Suppose that the delta of the portfolio (calculated with respect to actual changes) is 12, the value of the asset is $10, and the daily volatility of...
See AnswerQ: An insurance company’s losses of a particular type per year are to
An insurance company’s losses of a particular type per year are to a reasonable approximation normally distributed with a mean of $150 million and a standard deviation of $50 million. (Assume that the...
See AnswerQ: Suppose that you know the gamma of the portfolio in Problem 14
Suppose that you know the gamma of the portfolio in Problem 14.18 (again measured with respect to actual changes) is –2.6. Derive a quadratic relationship between the change in the portfolio value and...
See AnswerQ: A company has a long position in a two-year bond
A company has a long position in a two-year bond and a three-year bond as well as a short position in a five-year bond. Each bond has a principal of $100 and pays a 5% coupon annually. Calculate the c...
See AnswerQ: A company has a position in bonds worth $6 million.
A company has a position in bonds worth $6 million. The modified duration of the portfolio is 5.2 years. Assume that only parallel shifts in the yield curve can take place and that the standard deviat...
See AnswerQ: Why is there an add-on amount in Basel I for
Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How woul...
See AnswerQ: Estimate the capital required under Basel I for a bank that has
Estimate the capital required under Basel I for a bank that has the following transactions with another bank. Assume no netting. (a) A two-year forward contract on a foreign currency, currently worth...
See AnswerQ: A bank has the following transaction with a AA-rated corporation
A bank has the following transaction with a AA-rated corporation: (a) A two-year interest rate swap with a principal of $100 million that is worth $3 million. (b) A nine-month foreign exchange forward...
See AnswerQ: Suppose that the assets of a bank consist of $500 million
Suppose that the assets of a bank consist of $500 million of loans to BBB-rated corporations. The PD for the corporations is estimated as 0.3%. The average maturity is three years and the LGD is 60%....
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