Report

Assignment on Fixed Securities

Course name: TSMT

FAS Group:
Mahathi Nukala
Saptarisha Chatterjee
Satwik Nag
Sourav Dhar
Trishul Buddha

15F228
15F244
15F245
15F253
15F256

TERM 5 2016
T A PAI MANAGEMENT INSTITUTE, MANIPAL
Problem:
Suppose an FI has a $1 million market value position in a ZCB of seven years to maturity with a
face value of $1,631,483. Todays yield on these bonds is 7.243 percent per year. Historical data
suggest the standard deviation of the daily yield change of ZCBs of maturity 7 years was 10
basis points (bps) .Suppose the FI also has a USD 1.6 million trading position in spot euros at

the close of business on a particular day. Suppose that, looking back at the daily changes in the
euro/USD exchange rate over the past several year, we find that the volatility of daily changes in
the spot exchange rate was 56.5 bp. Suppose the FI also holds a $1 million trading position in a
portfolio stocks that reflect a broad-based U.S. stock market index (like S&P500). Over the last
year, the standard deviation of the daily returns on the stock market index was 200 bp. Also
correlation matrix between daily seven-year zero-coupon bond yield changes, spot exchange rate
changes, and changes in daily returns on an S&P500 index is given below
7-year ZCB
7-year ZCB
Euro/USD
S&P 500

Euro/USD
-0.2

S&P 500
0.4
0.1

You are required to find analytically the (90% daily) DEARs of each individual asset class in the
FIs portfolio and also required to calculate the 1 day 90% VaR of this portfolio. Sate your
assumption clearly. Make use of tables as required
Solution:
The Valuation as given below Asset Class

Value

7-year ZCB
USD 1000000
Euro/USD
USD 1600000
S&P 500
USD 1000000
The Covariance Matrix as below
7-year ZCB
7-year ZCB
Euro/USD
S&P 500

Standard
Deviation
0.001
0.00565
0.02
Euro/USD
-0.2

Weightage
0.277778
0.444444
0.277778

S&P 500
0.4
0.1

Applying three asset portfolio correlation formula we get the portfolio variance as
p2= wA2 2A + wB2 2B + wC2 2C+ 2 wA wBAB A B+ 2 wA wC AC A C+ 2 wB wCBC B C

Putting the values

p2 = (0.277778^2)*(0.001^2) + (0.444444^2)*(0.00565^2) + (0.277778^2)*(0.02^2) +

(2*0.277778)*(0.444444*0.001*0.00565*-0.2) + 2*0.277778*0.277778*0.001*0.02*0.4 +
2*0.00565*0.444444*0.277778*0.02*0.1
= 4.099275*10^-05
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p = 0.006402558

Standard Deviation of the portfolio = Portfolio value * p

= 3600000 * 0.006402558
= 23049.21
The Z value for 90% confidence interval is = 1.28
Asset Class
7-year ZCB
Euro/USD
S&P 500
Portfolio

1 Day VaR at 90%

confidence Interval
=1000000 * 0.001 * 1.28
=1280
=1600000 * 0.00565 * 1.28
=11571.2
=1000000 * 0.02 * 1.28
=25600
=23049.21 * 1.28
=29502.9888

Conclusion:
For the portfolio we are 90% certain that the loss accounted on one trading day will not exceed
the value = 29502.9888

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