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D eep ak H oo da De ep ak Ho od a D De epa ak Ho od a D ee
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pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak
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11. Market Risk
D eep ak H oo da De ep ak Ho od a D e epa k Ho od a D
ee pa k H oo da D e a H oo da

D
da D ee pa k H oo da De ep ak H ood a De ep ak Ho od a
e
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D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

D eep ak H oo da De ep ak Ho od a D e epa k Ho od
e
D
D
D eep pak H oo da De ep ak Ho od a D De epa ak Ho
e ep k Ho od a
where the market value of a portfolio changes by ₹ 1,00,000 for 1 % change in the rate of interest,
d
ep k H od a
the interest rate sensitivity of the portfolio is
ep k H od a
a) ₹ 1,00,0000.
b) ₹ 1,00,000
o
c) ₹ 1,00,00
d) ₹ 1,00,0
o
o
++++++++++++++++++++++++++++++++++++
k
₹ 1,00,000
p
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The dealer at Champak Bank purchased 5000 shares of a public sector undertaking at ₹ 200 per
shares totaling ₹ 10,00,000. If the price change is 1 %, there will be impact of ₹ 10000. The price
e
change can go up to 4 %. that m y result into a loss of ₹ 93040.
D
01In this transaction, the stock price is known as:
e
e
a) market factor
H od a d
b) market factor sensitivity
c) volatility
D ee a H oo da D ep ak H o a
d) defeasance period
ee a H oo da D e a H o a
o
p
p
02. What Is the market factor sensitivity:
d
o
d
a) 5000 shares
D
b) ₹ 200 per shares

D
a De ep ak Ho od a D ee pa k
c) ₹ 10 lac
o
d) ₹ 10000
o
k
d
d
03. The price change can go up to 4%. This means the daily is 4%
a) defeasance factor
k
p
k
b) market factor
o
c) volatility
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d) value at risk
p
e
p
04. The defeasance period in this transaction is:

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a) one day
d
e
b) 2 days
e
D ep ak H o a
a
c) 4 days
D e a
p
d) 7 days
o
5. What is the value at risk (VaR) in this transaction:

D ee
a) ₹ 93040
e
b) ₹ 100000
k
c) ₹ 105900
d) ₹ 120000
++++++++++++++++++++++++++++++++++++
p
od
od
The stock price is known as market factor.

H od a
H od a
₹ 10000 is the market factor sensitivity as with 1% change, the effect would be ₹ 10000.
k
This is called volatility i.e. daily fluctuation.

D
o
The defeasance period represents the daily fluctuation period.

o
The possible loss is called value at risk, calculated as 1000000 x 4 x 2.326 = 93040. (2.326 is Z score
od a d
Ultimate Study Material is Macmillan Book Only

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Deepak Hooda
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e e p a k H oo da D
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ep
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2
11. Market Risk

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e
e

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e ep k Ho od a
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d
ep k H od a
ep k H od a
The VaR of a Govt. of India bond security is 0.70%. The current yield is 8.10%.
o
1. In the worst case scenario; the prospective:
a) buyer of the security can expect, the yield to fall to 7.40% by next day
b) buyer of the security can expect, the yield to rise to 8.80% by next day
o
c) seller of the security can expect, the yield to fall to 7.40% by next day
o
k
d) none of the above
2. In the worst case scenario, the prospective:
p
a) seller of the security can expect, the yield to fall to 7.40% by next day
b) buyer of the security can expect, the yield to rise to 8.80% by next day
c) seller of the security can expect , the yield to rise 8.80% by next day
e
d) None of the above
D
3. In the above case. the Var at 95% confidence level means
e
a) there is 5% possibility for the yield to be higher than 0.70%
e
H od a
b) there is 1% possibility for the yield to be higher than 0.70%
d
c) there is 5% possibility of adverse change being higher than 0.70%
d) Inadequate information to draw any conclusion
o
++++++++++++++++++++++++++++++++++++
p
p
d
1. VaR of 0.70% means that the maximum change in the yield can be 0.70%. Hence in a worst case
d
D
scenario, the buyer of the security can expect the yield to fall to 7.40% (8.10 - 0:70%), by next day and
D
the seller can expect the yield to rise to 8.80% (8.10 + 0. 70%)
o
o
k
2. VaR of 0.70% means that the maximum change in the yield can be 0.70%. Hence in a worst case
d
scenario, the buyer of the security can expect the yield to fall to 7.40%. (8.10 - 0.70%) by next day and
d
the seller can expect the yield to rise to (8.10 + 0.70%)
k
p
k
o
3. VaR At 95% confidence level, the possibility for an adverse change in yield being higher than 0.70% is
o
only to the extent of 5% (i.e. loss being higher than 0.70%). At 99% confidence, this possibility is to the
D
p
extent of 1% only
e
p
k
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k
d
e
Based on previous 60 days' trading data, the following information is available:

D ep ak H o a
a
D e a
Volatility per day = 2% (i.e. about 32% per year 2 x 252)

p
No. of observations (N) = √10

o
Confidence level = 99%

D e
Investment amount= ₹ 60000

e
Standard deviation of change in market price = ₹ 1200/day (60000 x 2%)

e
Standard deviation of change in 10 days = ₹ 1200 x √10 = 3794.73

k
Assumed that expected change in the value of bank's share is zero.

Assumed normal trading conditions.
The Var will be=
p
od
++++++++++++++++++++++++++++++++++++
od
H od a
H od a
Hence at 99% confidence level, Z value as per Table is

k
k
D
= 2.33 VAR= 2.33 x 3794.73 = ₹ 8846.73 (for one year i.e. 252 days= 44385)
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o
od a d

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Deepak Hooda
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e e p a k H oo da D
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ep
o
p
3
11. Market Risk

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e
e

e
D
D
e ep k Ho od a
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d
ep k H od a
ep k H od a
Z purchased stock of AB Ltd. He can inform his Boss in following 3 ways:
o
1. He purchased 1000 shares of stock A at ₹ 800 per share.
2. He has taken ₹ 800000 position in stock A
3. He invested. in stock If price changes by 1 % he would have impact of ₹ 8000. Price is expected
o
to fluctuate 2% daily, he estimates daily potential loss of ₹ 32800, at 96% confidence.
o
k
Var will be =
++++++++++++++++++++++++++++++++++++
p
1. Market Factor - Stock price
2. Market factor sensitivity- ₹ 8000 (1 % of total position)
3. Volatility (daily) = 2% Total amount= 8,00,000 x 2% = 16000
e
4. Defeasance period= 1 day (to sell the stock)
D
5. Defeasance factor at 2% volatility= 16000 x 2.05 (@ 96% confidence)
6. Value at risk = 32800 (i.e. potential loss under normal market conditions) (Z value at 96% = 2.05)
e
e
H od a
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d
Mr. X takes a position in stock 'A' and purchased 1,000 shares of stock 'A' at ₹ 600 per share with
Market Factor Sensitivity as 1% and the price is expected to fluctuate 3% daily. Value at Risk (VaR)
o
for above stock would be

p
p
a) ₹ 41,868
d
o
d
b) ₹ 45,868
D
c) ₹ 48,868
D
d) ₹ 51,868
o
o
k
++++++++++++++++++++++++++++++++++++
d
d
600000×1%=6000
k
6000×3×2.326=41868
k
o
(@99%confidence level)
o
D
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p
e
p
The VAR on a portfolio using a one day time horizon is $ 100 million. What is the VAR using a 10
k
day horizon ?
d
e
a) 316
D ep ak H o a
a
D e a
b) 318
p
c) 416
o
d) 418
D ee
++++++++++++++++++++++++++++++++++++
e
Variance scales in proportion to time.

k
So variance gets multiplied by 10

And Std deviation by √10
VAR = 100 √10
p
= (100) (3.16) = 316

od
od
(σN2 = σ12 + σ22 ….. = Nσ2)

H od a
H od a
k
k
D
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od a d

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Deepak Hooda
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e e p a k H oo da D
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ep
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4
11. Market Risk

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e
e

e
D
D
e ep k Ho od a
If the daily VAR is $12,500, calculate the weekly, monthly, semiannual and annual VAR. Assume
d
ep k H od a
250 days and 50 weeks per year.
ep k H od a
++++++++++++++++++++++++++++++++++++
o
Weekly VAR＝(12,500) (√5)＝27,951
Monthly VAR＝( 12,500) (√20)＝55,902
o
o
Semiannual VAR＝ (12,500) (√125)＝139,754
k
Annual VAR ＝(12,500) (√250)＝197,642
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p
Consider a position consisting of a $100,000 investment in asset A and a $100,000 investment in
asset B. Assume that the daily volatilities of both assets are 1% and that the coefficient of
e
correlation between their returns is 0.3. What is the 5-day 99% VaR for the portfolio?
a) $9,401
b) $7401
D
e
e
c) $8,388
H od a
d) $6,401
d
++++++++++++++++++++++++++++++++++++
o
The standard deviation of the daily change in the investment in each asset is $1,000. The variance of the
p
p
portfolio’s daily change is
d
o
d
D
D
o
o
k
d
1 0002  1 0002  2  03 1 000 1 000  2 600 000

k
p
k
The standard deviation of the portfolio’s daily change is the square root of this or $1,612.45.
o
The standard deviation of the 5-day change is

D
p
1,612.45 5  $3,605.55
e
p
From the tables of N ( x ) we see that N(−2.326)=0.01.

k
This means that 1% of a normal distribution lies more than 2.326 standard deviations below the mean.
d
e
e
D ep ak H o a
The 5-day 99 percent value at risk is therefore 2.326×3,605.55 = $8,388.

a
D e a
p
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p
Consider a portfolio of $5 million in AT&T shares with a daily volatility of 1%. Calculate the 99%
o
VAR for 10 day horizon.

D e
a) $ 368,405
e
b) $ 116,500
c) $ 50,000
k
d) $ 70,000
++++++++++++++++++++++++++++++++++++
p
σ =1%=(.01) (5,000,000)= $ 50,000

od
od
H od a
Daily VAR=(2.33) (50,000)= $ 116,500

H od a
10 day VAR =$ 116,500x √10= $ 368,405

k
k
D
o
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od a d

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Deepak Hooda
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e e p a k H oo da D
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ep
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5
11. Market Risk

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e
e

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D
e ep k Ho od a
Consider a portfolio made up of 5 year 5 % coupon government bonds. The bonds are trading at $
d
ep k H od a
100. The historical annual volatility is 1 %. Expected YTMs are normally distributed with zero mean
ep k H od a
and volatility of 1%. Calculate the 95% one year VAR.
a) $ 3.83
o
b) $ 4.83
c) $ 5.83
d) $ 6.83
o
o
k
++++++++++++++++++++++++++++++++++++
Worst YTM = actual YTM + 1.65 x Volatility
p
= 5 + 1.65 x 1 = 6.65%
If YTM is 6.65%, bond price will be 93.1708
So the VAR is 100-93.17 = $ 6.83
e
D
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Consider the following single bond of $10 million, a modified duration of 3.6 yrs and annualized
e
e
yield of 2%. Calculate the 10 day holding period VaR of the position with a 99% confidence
H od a
interval, assuming there are 252 days in a year.
d
a) $334,186
b) $234,186
c) $434,186
o
p
p
d) $534,186
d
o
d
++++++++++++++++++++++++++++++++++++
D
D
VAR = $10,000,000* 0.02*3.6* √10/252 * 2.33 = $334,186

o
o
k
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d
d
Consider the contract on the dollar/euro exchange rate (EC) traded on the CME. The notional
k
amount is 125,000 Euros. Assume that the annual volatility is 12% and the current price is $1.05
k
o
per Euro. Find daily VAR at 99% confidence level.

o
a) $ 1310
D
p
b) $ 2310
e
p
c) $ 3310
k
d) $ 4310
k
d
e
++++++++++++++++++++++++++++++++++++
D ep ak H o a
a
D e a
p
VAR = (2.33) [(.12)/√252] × (125,000 × 1.05) = $ 2310

o
D e
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e
A fund has a portfolio consisting of 40% fixed income and 60% equity. The estimated 95% annual
VAR assuming 250 trading days for the entire portfolio was $ 1,367,000 based on the portfolio’s
k
market value of $ 12,500,000. The correlation between bond and stock returns is 0.The annual loss
on the equity part of the portfolio is expected to exceed $ 1,153,000 5% of the time.
What will be the daily expected loss that will be exceeded 5 % of the time for the bond portfolio?
p
a) 46,445
od
od
b) 36,445
H od a
H od a
c) 26,445
k
d) 16,445
D
o
o
od a d

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Deepak Hooda
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e e p a k H oo da D
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ep
o
p
6
11. Market Risk

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e
e

e
D
D
e ep k Ho od a
++++++++++++++++++++++++++++++++++++
d
ep k H od a
ep k H od a
1,367,000^2 = 1,153,000^2 + x^2
X = $ 734,357
o
Daily VAR = 734357/√250
= 46,445
o
############################################################################
o
k
Follow Bank has a $1 million position in a five-year, zero-coupon bond with a face value of
$1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change
in daily yields is 0.0 percent, and the standard deviation is 12 basis points.
p
++++++++++++++++++++++++++++++++++++
e
a. What is the modified duration of the bond?
MD = D/(1 + R) = 5/(1.07) = 4.6729 years
D
b. What is the maximum adverse daily yield move given that we desire no more than a 5 percent chance
e
that yield changes will be greater than this maximum?
e
H od a
Potential adverse move in yield at 5 percent = 1.65σ = 1.65 x 0.0012 = .001980
d
c. What is the price volatility of this bond?
Price volatility = MD x potential adverse move in yield = 4.6729 x .00198 = 0.009252 or 0.9252 percent
d. What is the daily earnings at risk for this bond?

o
DEAR = ($ value of position) x (price volatility) = $1,000,000 x 0.009252 = $9,252

p
p
d
o
d
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D
D
An 8-year 8% semi-annual bond has a BPV of ₹ 125. The yield on the bond has increased by 5 basis
o
points. What is the profit or loss suffered due to increase in yield?

o
k
(a) A profit of ₹ 1000

d
(b) A loss of ₹ 1000

d
(c) A profit of ₹ 625
k
(d) A loss of ₹ 625

k
o
1 day VaR of a portfolio is ₹ 500,000 with 95% confidence level. In a period of six months (125 working
D
p
days) how many times the loss on the portfolio may exceed ₹ 500,000?
e
p
(a) 4 days
k
(b) 5 days
k
d
(c) 6 days
e
e
D ep ak H o a
(d) 7 days
a
D e a
p
A bond with remaining maturity of 5 years is presently yielding 6%. Its modified duration is 5%. What is its
o
McCauley's duration?
D e
(a) 5.05 years

e
(b) 3. 77 years
(c) 5.30 years
k
(d) 6.00 years

p
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od
od
H od a
Bank holds 3 years bonds with face value of ₹ 1000 and coupon rate of 6% payable half-yearly.
H od a
k
The current yield is 10% on this bond.

k
D
o
1. What is the present market value of the bond?

od a d

k
Deepak Hooda
d)
c)
b)
e a)
ee a H oo da D e a H o a e ep k H od a
k e p k o d o D ep
ee pa H oo da D e a H o a De ep ak H o a e
d) 871.13
c) 886.82
b) 892.13
a) 898.49
₹ 1000
a) 3 years
a) 3 years
d) ₹ 11.77
c) ₹ 11.21
b) ₹ 10.50
a) ₹ 10.00
₹ 857.91
₹ 898.49
₹ 942.34
d) 1.0000%
c) 1.1205%
b) 1.2293%
a) 1.3095%
c) 2.7761 years
b) 2.9054 years
d) 2.6190 years
b) 2.9054 years
d) 2.6190 years
c) 2.7761 years
k o od
D ee p a k o d D ee a H oo da D e a H
k
H od a p o
2. What is the duration in the above case:
d D
++++++++++++++++++++++++++++++++++++
od a e p k o d D ee pa k H oo da D e a H oo da
5. What will be change in the value of the bond?

a De ep ak Ho od a D ee pa k o d D e e p a k H oo da D
e
3. Calculate the modified duration in the above case:
D ep ak H o a e p k H od a
o e p k o d D
e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
ee pa H oo da D e a H o a De ep ak H o a p
k e p k o d
6. What will be the new value of bond after increase in yield from 10% to 10.5%
o od
D e a D ee a H oo da D e a H
k
H od a p o
4. In the above case, if the yield changes from 10% to 10.5% what will be percentage in value:

7

D ee a H oo da D ep ak H o a e ep k Ho od a
6%.
k e p k o d e ep k H od a
o D e ep
d) 2 years
a) 3 years
d) 2 years
a) 3 years
a) ₹ 26.27
c) 2.7 years
c) 2.7 years
b) 2.86 years
b) 2.86 years
e p k d
Hence Half yearly= ₹ 30.

k o od o D
= 898.49 x 1.3095 = 11.77

D e a k
= 2.6190 x 0.5 = 1.3095 %

p o
1. What is duration of the bond?

H od a
1. Annual coupon is ₹ 60 (1000 x 6%).

2. What is modified duration of the bond?

d D ee pa H oo da D e a H o a De ep ak H o a
e
k
5. Change in value of bond = Value x percentage change

o e p o d D
6. Original value - change in value= 898.49 -11.77 = 886.82

e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
4. Percentage change in value = MD x numerical change in the stated yield

pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak 3. Modified duration or MD= Macaulay's duration/(1 + r) = 2.7761/1.06 = 2.6190
k e p k d
Price of the bond and Macaulay's duration can be answered referring above method
o od
D e a o D ee a H oo da D e a H
k
3. If there is further change of expected yield to 7%, what will be change ln price?
H od a p o
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Bank-Z purchased 5%, 3 year bond with face value ₹ 1000 at ₹ 973.27 when expected yield was

8

o D e ep
a) ₹ 40
a) ₹ 960
d) ₹ 34.08
c) ₹ 30.12
b) ₹ 28.29
b) 50 paise
d) ₹ 934.56
c) ₹ 947.00
b) ₹ 961.13
a) ₹ 973.27
c) 80 paise
increase in the yield.

k o od
k
d) inadequate information
= 2.7 x 0.01 x 973.27 = ₹ 26.27
p o
Macaulay's duration = 2.8572 years

H od a
period, what will be price of security:

d D
++++++++++++++++++++++++++++++++++++
d
Price change = MD x change in yield x purchase price

a De ep ak Ho od a D ee pa k o D e e p a k H oo da D
New price = Old price - chance = 973.27 - 26.27 = ₹ 947

p k e
Modified duration= DI (1+YTM) = 2.8572/1.06 = 2.7 years

o e o d D
e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
4. If there is further change of expected yield to 7%, what will be new price?
k o od e
D e a p k o d D ee a H oo da D e a H
k
yield, Due to change in yield to 9%, the value of the securities declined to ₹ 1020.
Price of the bond and Macaulay's duration can be answered referring the below Example

H od a p o
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Champak Bank purchased 8% govt. securities, with face value of ₹ 1000 at ₹ 1060 each for 8.5%
01. On the basis of above information, calculate change in basis point value for each basis point
02 If there is increase in yield by 100 basis points, instead of 50 basis points as above, during this
9

e
p
e e p a k H oo da D
o
ep
o
p
10
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
b) ₹ 980
d
ep k H od a
c) ₹ 1040
ep k H od a
d) ₹ 1080
o
03. The bank decides to sell the security immediately, to stop the loss. How much it will lose on
the sale transaction ?
a) ₹ 20 per bond
o
o
b) ₹ 30 per bond
k
c) ₹ 40 per bond
d) inadequate Information.
p
++++++++++++++++++++++++++++++++++++
1. Change in value I change in yield = (1060-1020)/(9.00 - 8.50) = ₹ 40/50 basis points= 80 paise
e
2 Change in basis point
D
= Change in value/change in yield = (1060-1020)/(9.00 - 8.50)
= ₹ 40/50 basis points = 80 paise.
e
e
H od a
Change for 100 basis points = 80 p x 100 = ₹ 80. Value = Old price - change = 1060- 80 = 960
d
3 Loss = purchase price - current value at which it can be sold = 1060 - 1020 = ₹ 40
o
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p
p
d
1. X purchased 20000 shares at ₹ 50 per share (total amount ₹ 10 lac) with his own capital plus
o
d
D
borrowing from market (his borrowing limit being 9 times of his capital. Hence ratio = 1- 9). In a
D
few days, there is 2% decline in the value of shares, which reduced the value of his portfolio to ₹
980000 and also the amount of his capital by ₹ 20000 (leaving capital of ₹ 80000).
o
o
k
d
2. In the light of reduction in capital to ₹ 80000, he is required to liquidate the holding by ₹ 2 lac
d
(10 times of reduced capital) to pay the excessive borrowing (due to reduced capital). But the
k
market expects further fall in the value of this stock due to which the investment has become
k
o
illiquid. In such circumstances, he can liquidate the holding at a loss only, which will further
o
deplete his capital, which would force him for further liquidation of his holding for keeping the
D
p
borrowing in permissible limit of 9 times of capital.

e
p
k
3. In case the liquidity position of the market suffers, it will further drive the share price down,
k
which would result in losses.

d
e
e
D ep ak H o a
a
D e a
p
1. The risk of adverse movement in the price of shares has reduced the capital. This is called:
p
a) price risk
o
b) asset liquidity risk

D e
c) market liquidity risk

e
d) liquidation risk
k
2. For a specific security, as in the above case, when the liquidity in the market is reduced, it is
called:
p
a) price risk
od
od

H od a
H od a

k
d) liquidation risk
D
o
o
od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
11
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
3. In case the liquidity position of the market suffers, it will further drive the share price down,
d
ep k H od a
which would result in losses. This is called:
ep k H od a
a) price risk
o
d) liquidation risk
o
o
++++++++++++++++++++++++++++++++++++
k
1. The risk of adverse movement in the price is called price risk
p
2. The risk of reduced liquidity in the market for a specific security is called asset liquidity risk.
3. In case the liquidity position of the market suffers, it will further drive the share price down, which would
e
result in losses. This is called market liquidity risk.
D
############################################################################
e
e
Champak Bank made an investment in govt. bonds worth ₹ 5 Cr. The maturity period of the bonds
H od a
is 5 years, the face value is ₹ 100 and the coupon rate is 8%. The bond has a market yield of 10%
d
and the price is ₹ 92.00. Due to change in interest rates, the market yield changes to 9.90% and the
market value to ₹ 92.50.
o
p
p
1. Based on the above information, please calculate the basis point value of the bond:
d
a) 0.02
d
D
b) 0.05
c) 0.10
D
o
d) 0.20
o
k
d
2. What will be the change in value of investment, for the total investment of ₹ 5 Cr for per basis
d
point change in the yield?
k
a) ₹ 25000
p
k
b) ₹ 20000
o
c) ₹ 15000
D
d) ₹ 10000
p
e
p
k
3. If there is 0.10% change in the yield, what will be change in the value of the bond on an
k
investment of ₹ 5 Cr:
d
e
e
D ep ak H o a
a) 100000
a
D e a
p
b) 200000
p
c) 250000
o
d) 500000
D ee
++++++++++++++++++++++++++++++++++++
k
1. Change in price of bond = 0.50.

Change in yield 10 basis points. Per basis point change= 0.50/.10 = ₹ 0.05
p

od
Change in yield 10 basis points.

od
H od a
Per basis point change = 0.50/.10 = ₹ 0.05 OR Per ₹ 1 Cr = ₹ 5000

H od a
k
For total investment the change = 50000000 x 0.05 = 25000

k
D
o
o
od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
12
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
d
ep k H od a
Change in yield 10 basis points.
ep k H od a
Per basis point change = 0.50/.10 = ₹ 0.05 OR. Per ₹ 1 Cr = ₹ 5000
For total investment the change = 50000000 x 0.05 = 25000
o
If per basis point change, the value change is ₹ 25000, for 10 points it will be 25000 x 10 = 250000
o
o
############################################################################
k
Champak Bank has a credit exposure of ₹ 80 Cr which is secured by financial collateral security of
A+ rated bonds of ₹ 40 Cr issued by a Public Sector Undertaking of Govt. of India. The period of
p
this exposure is 4 years and the residual maturity of the financial collateral is 3 year The financial
collateral is an eligible credit risk mitigant. There is no currency mismatch. (As per RBI guidelines
the haircut applicable to this collateral is 6% and the haircut on account of currency mismatch is 0
if no currency mismatch is there and 0.08, if there is currency mismatch).
e
D
1. Based on the above information, calculate the haircut adjusted collateral value:
a) ₹ 40.00 Cr
e
e
H od a
b) ₹ 37.60 Cr
d
c) ₹ 27.57 Cr
d) ₹ 12.43 Cr
o
2. On the basis of above information, what is value of haircut adjusted collateral after adjustment
p
p
on account of maturity mismatch:
d
o
d
a) ₹ 40.00 Cr
D
b) ₹ 37.60 Cr
D
c) ₹ 27.57 Cr
o
d) ₹ 12.43 Cr
k
d
d
3. On the basis of above information, calculate the value of exposure at Risk.
a) ₹ 40.00 Cr
k
p
k
b) ₹ 37.60 Cr
o
c) ₹ 27.57 Cr
D
d) ₹ 12.43 Cr
p
e
p
++++++++++++++++++++++++++++++++++++
k
1. In this case the residual maturity of collateral is less than the residual maturity of the loan, hence there
d
e
e
D ep ak H o a
is maturity mismatch. There is ·· no currency mismatch as stated in the problem. To find out the net
a
D e a
p
exposure qualifying for capital adequacy purpose, at the first stage, the hair cut of the collateral will be
p
calculated and then value of hair-cut adjusted collateral will be calculated, taking into account the
o
adjustment on account of maturity mismatch.

D e
Stage 1 - Haircut adjusted collateral value or C = C x (1 - He- Hfx),

e
C = 40 x (1 - 6% - 0%) = 40 x 94% = ₹ 37.60 Cr.

(Here, C is original value of collateral. He is haircut appropriate to the collateral security (as per RBI
k
guidelines it is 6%) and Hfx is the haircut for currency mismatch (0% if exposure and collateral are in the
same currency and 0.08% if the exposure and collateral are in the different currency).
p
State 2 - Value of haircut adjusted collateral after adjustment on account of maturity mismatch:
od
od
P = c x (t- 0.25)/(T - 0.25)

H od a
H od a
= 37.60 x (3-0.25)/(4-0.25)
k
= 37.60 x 2.75/3.75 = 27.57.

D
o
o
od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
13
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
(P= value of credit risk mitigant adjusted for maturity mismatch, t is minimum of T and residual maturity of
d
ep k H od a
credit protection expressed in years and T is minimum of 5 years and residual maturity of exposure
ep k H od a
expressed in years
o
2. As above
3. As above
o
o
k
############################################################################
Calculate exposure for borrower under Basel Ill
p
Borrower X Borrower Y
Exposure. 200 200
e
Maturity of exposure 6 2
Nature of exposure
Currency ₹ D
Corporate Corporate
₹
e
Rating of exposure BBB Unrated
e
H od a
Haircut for exposure 12% 15%
d
Value of collateral after hair cut 132 136
E* = max {0, [E x (1 + He f C x (1 - He - Hfx]}
o
p
E* = the exposure value after risk mitigation
p
d
E = current value of the exposure for which the collateral qualifies as a risk mitigant
o
d
He = haircut appropriate to the exposure
D
D
C = the current value of the collateral received
Hc=haircut appropriate to the collateral

o
o
k
Hfx = haircut appropriate for currency mismatch between the collateral and exposure
d
d
Exposure for X = max {0, [ 200* (1.12) - 132}
k
= max {0, (224-132]}

p
k
= ₹ 92 Crore
o
Note: in this questions value of collateral after appropriate haircut has been given thus we need not
D
calculate C x (1 - He - Hfx) portion

p
e
p
k
Similarly, Exposure for Y = max {0, [ 200* (1.15) ]- 136}

k
= max {0, (230-136]}

d
e
= ₹ 94 Crore
D ep ak H o a
a
D e a
p
Question 4: Businessman bank granted a corporate loan of ₹ 20 Crore to XYZ limited repayable over 5
o
year for an haircut of 6%. The credit rating of company is A. The value of collateral in the account is r10
D e
Crore in the form of unrated bonds issued by another bank with a residual maturity of 4 year Haircut for
e
exposure is zero
k
a. what is the value of collateral security after prescribed haircut

Value of collateral security after prescribed haircut is
C x (1-He-Hfx)
p
10 x (1-0.06)
od
od
= 9.4 Crore
H od a
H od a
k
b. what is the value of net exposure after credit risk mitigation

D
o
E* = max {0, [Ex (1 + He) - C x (1 - He - Hfx)]}

o
= max [ 0, [ 20 * (1+0)- 9.4]

od a d

k
Deepak Hooda
o D e
= 5.3 Crore
by 100 bps
by 100 bps
e ep
= 10.6 Crore
c) 96.92
b) 99.48
c) 97.64
b) 99.48
d) 105.74
a) 109.68
d) 102.08
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
d) 104.01
c) 103.00
b) 101.64
a) 101.48
= max [ 0, (10.6]
= max [ 0, (20-9.4]
k o od
k
H od a p o
investment in following two securities as under.
e
o e p k o d D
c. What is the value of risk weighted asset for this exposure
e p
Deepak Hooda
k e p k o d o D e
8% Treasury Bond (TB-2) of Face Value ₹ 100 for 8 years: ₹ 60000
6% Treasury Bond (TB-1) of Face Value ₹ 100 for 5 years: ₹ 40000
11. Market Risk
4. What would be the price of TB-2 as on 31st Dec.2015 if the yield is 7.65%
3. What would be the price of TB-1 as on 31st Dec.2015 if the yield is 5.45%.
k o od e
k
H od a p o
############################################################################

Since the credit rating of company is A it carries risk weight of 50%. Thus RWA would be 50% of 10.6

5. What would be the price of TB-1 as on 31st Dec.20l4 if the yield as on 31st Dec.2014 increases
Lakshay Bank Ltd. needs to invest ₹ 100000 as on 31st December 2013 and decides to spread its
6. What would be the price of TB-2 as on 31st Dec.2014 if the yield as on 31st Dec.2014 decreases
14

e
p
e e p a k H oo da D
o
ep
o
p
15
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
d
ep k H od a
7. If the Bank sells TB-l on 31st Dec.2014 at the prevailing yield, how much would be the Profit or
ep k H od a
Loss to the bank
a) 1200
o
b) (1200)
c) 208
d) (208)
o
o
k
8. If the decides Bank sells TB-2 on 3lst Dec.2014 at the prevailing yield, how much would be the
profit or loss to the bank.
a) 1604
p
b) (1604)
c) 2406
d) (2406)
e
D
9. If the Bank decides to sell both the Securities on 31st Dec.2015 at the respective prevailing
yields of 5.45% & 7.65%, how much would be the Profit or Loss to the bank
e
e
a) 1544
H od a
b) (1544)
d
c) 1576
d) (1576)
o
p
p
d
++++++++++++++++++++++++++++++++++++
o
d
D
D
1 Market Price is the price at which the Bond can be sold or purchased in the market. It is calculated by
reducing the 'future value' of all the amounts to be received in future to 'present value' and then adding up
o
all the values. Hence

k
d
d
Market Price= Coupon Amount I (1 +r%) + Coupon Amount I (l +r%)^2 + Coupon Amount / (1 +r%)^3……
+ (Coupon Amount+ Principal Amount) / (1 +r%)^n
k
p
k
o
In the instant case, Principal Amount= ₹ l00

D
Future flows = 6% of 100 i.e. = ₹ 6

p
e
p
r = 5.15% i.e., market rate of interest, and

n = 4 years, remaining number of years.
k
k
d
e
Market Price
D ep ak H o a
a
D e a
= 6/(1 +5.15%) + 6/(1 +5.15%)^2 + 6/(1 +5.15%)^3 + 6/ (1 +5.15%)^4+ 100/(1+5.15%)^4

p
= 6/ (1.0515) + 6/ (1.0515) ^2 + 6/ (1.0515)^3 + 6/ (1.0515)^4 + 100/ (1.0515)^4

o
= 5.71 + 5.43 + 5.16 + 4.92+ 82.11 = 103.00

D ee
2. Going by what is explained above, In this case.

Principal Amount = ₹ 100
k
Market Price= 8/ (1 +7.25%) + 8/ (1 +7.25%)^2 + 8/ (1 +7.2 %) ^3+ 8 (1+7.25%)^4 + 8/ (1 +7.25%)^5 + 8/

(1+7.25%)^6 +100 +7.25%)^6.
= 7.46 + 6.95 + 6.48 + 6.05 + 5.64 + 5.26 + 4.90+ 65.70 = 104.01
p
od
3. In the instant case, Principal Amount= ₹ 100 Future flows= 6% of 100 i.e., = ₹ 6
od
H od a
H od a
r = 5.45% i.e., market rate of interest, and

k

k
D
o
Market Price= 6/ (1 +5.45%) + 6/ (1 +5.45%)^2 + 106/ (1 +5.45%)^2

o
= 5.69 + 5.39 + 90.40=101.48

od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
16
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
d
ep k H od a
4. In the instant case, Principal Amount = ₹ 100
ep k H od a
Future flows = 8% of 100 i.e. =₹ 8
r = 7.65% i.e., market rate of Interest and
o
n = 6 years, remaining numbers of years.
Market Price =8/(1 +7.65%) + 8/(1 +7.65%)^2 + 8/(1+7.65%)^3 + 8/(1+7.65%)^4 + 8/(1 +7.65%)^5 +
108/(1 +7.65%)^6
o
o
=7.43 + 6.90 + 6.40 + 5.96 + 5.54 +.69.40 = 101.64
k
5. In the instant case, Principal Amount = ₹ 100
Future Inflows = 6% of 100 i.e., = ₹ 6
p
R=6.5% i.e., market rate of interest (because the yield increases by 100 bps over 31st Dec.2007 i.e., by 1
% and now becomes 6.15%, and N=4 years, remaining number of years.
e
Market Price=6/ (1+6.15%) +6/ (1+6.15%)^2 +6/ (1+6.15%)^3+ 106/ (1+6.15%)^3
D
= 6/ (1.0615) + 6/ (1.0615) ^2 + 6/ (1.0615) ^3 + 106/ (l.0615) ^3
= 5.65 + 5.32 + 5.02 + 83.49 = 99.48
e
e
H od a
6 In the instant case, Principal Amount = ₹ 100
d
Future flows= 8% of 100 i.e., = ₹ 8
r = 6.25% i.e., market rate of interest (because the yield decreases by 100 bps over 31st Dec.2007 i.e.,
by 1 % and now becomes 6.25%, and n = 7 years, remaining number of years.
o
p
p
d
Market Price= 8/ (1 +6.25%) + 8/ (1 +6.25_%)^2 + 8/ (1+6.25%)^3 + 8/ (1 +6.25%)^4 + 8/ (1+6.25%)^5

o
d
D
+ 8/ (1+6.25%)^6 + 108/ (1+6.25%)^7

D
= 7.53 + 7.09 + 6.67 + 6.28 + 5.90 + 5.56 + 70.65 = 109.68
o
o
k
7 If the bank sells TB-I at the rate of₹103/ it would get.

d
No. of securities= 400, Rate= 103, therefore amount= 400 x 103 = 41200
d
Initial investment is ₹ 40000 therefore profit= 41200-40000 = 1200
k
p
k
o
8 lf the bank sells TB-II at the rate of₹104.01, it would get.

o
No. of securities= 600, Rate= 104.01, Hence amount= 600 x 104.01 = 62406
D
Initial investment is ₹ 60000 therefore profit= 62406 - 60000 = 2406

p
e
p
k
9 a. If the bank sells TB-I at the rate of ₹ 101.48, it would get

k
No. of securities= 400, Rate= 101.48, Amount= 400 x 101.48 = 40592

d
e
Initial investment is ₹ 40000 therefore profit= 40592 – 4000=592

D ep ak H o a
a
D e a
p
b. If the bank sells TB-II at the rate of ₹ 101.64, it would get

o
No. of securities = 600, Rate= 101.64, Amount= 600 x101.64 = 60984

D e
Initial investment is ₹ 60000 therefore profit= 60984 -6000 = 984

e
Hence total profit= 592 + 984 = 1576

k
############################################################################
Lakshay Bank Ltd. makes certain investment in the Treasury Bonds of Face Value ₹ 100 as on
p
31st December 2013 as under

od
od
H od a
6% Treasury Bond (TB-1) for 5 years

H od a
k
8 % Treasury Bond (TB-2) for 8 years

e
k
D
o
o
od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
17
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
1. How much will be the change BPV for every 1 bps increase in the yield on TB-l on 31st Dec.15
d
ep k H od a
over the yield of 5.15% as on 31st Dec.14
ep k H od a
a) 0.0276
b) (0.0276)
o
c) 0.0482
d) (0.0482)
o
o
2. How much will be the change in BPV for every 1 bps increase in the yield on TB-2 on 31st
k
Dec.15 over the yield of 7;25% as on 31st Dec.14.
a) 0.0276
b) (0.0276)
p
c) 0.0482
d) (0.0482)
e
3. How much will be the change in BPV for every 1 bps decrease in the yield on TB-1 on 31st Dec
15 over the yield of 5.15% as on 31st Dec.14
a) 0.0216
D
e
e
b) (0.0216)
H od a
c) 0.0482
d
d) (0.0482)
4. How much will be the change in BPV for every 1 bps decrease in the yield on TB-2 on 31st
o
p
p
Dec.15 over the yield of 7.25% as on 31st Dec.14
d
a) 0.0274
o
d
D
b) (0.0274)
c) 0.0485
D
o
d) (0.0485)
o
k
d
++++++++++++++++++++++++++++++++++++
d
1 BPV is defined as the change in market price for every change in market rate of interest by 1 bps. In
k
p
k
the instant case BPV would be the change in Market

o
o
D
Price as on 31st Dec.2015 when it is compared with Market Rate of interest of 31st Dec.2014 i.e., 5.15%
p
e
p
& changed (increased by l bps) Market Rate of Interest i.e., 5.16%. It is calculated as.
k
i) MP as on 31st Dec.15 at 5.15% = 6/ (1 +5.15%) + 6/ (1 +5.15%)^2 + 106/ (1 +5.15%)^2

d
e
= 5.7061 + 5.4267 + 91.1755 = 102.3083

D ep ak H o a
a
D e a
p
ii) MP as on 3lst Dec.15at5.16%=6/ (1+5.16%) +6/ (1+5.16%)^2 + 106/ (1+5.16%)^2

o
= 5.7056 + 5.4256 + 91.1495 = 102.2807

D ee
BPV = ii-i = 102.2807 - 102.3083 = - 0.0276

k
2 In this case BPV will be equal to change in the market price as on 31st Dec 2015 at 7.25% & at 7.26%
(due to increase by l bps). It is calculated as
p
1. MP as on 31st Dec.15 at 7.25% = 8/ (1+7.25%)^2 + 8/ (1 +7.25%)^3 + 8/ (1 +7.25%)^4 + 8/ (1

od
od
+7.25%)^5 + 108(1+7.25%)^6
H od a
H od a
= 7.4592 + 6.9549 + 6.4848 + 6.0464 + 5.6377 + 70.9643=103.5473

k
k
D
o
ii. MP as on 31st Dec.15 at 7.26% = 8/ (1+7.26%) + 8/ (1+7.26%)^2 + 8/ (1 + 7.26%)^3 + 8/ (1 +7.26%)^4

o
+ 8/ (1 +7.26%)^5 +7.265 + 108/ (1 +7.26%)^5

od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
18
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
= 7.4585 + 6.9537 + 6.4830 + 6.0442+ 5.6351 +70.9246 = 103.4991
d
ep k H od a
ep k H od a
BPV = ii-i = 103.4991 -103.5473 =-0.482,
o
3 In this case BPV will be equal to change tµ the market price as on 31 Dec.2015
at 5. 15% & at 5 .14 % (due to decrease by 1 bps). It .is calculated as.
o
o
i. MP as on 31st Dec 15 at 5.15% = 6/ (1 +5 .15%) + 6/ (1 +5 .15%)^2 + 106/ (1+5.l5%)^2
k
= 5.7061 + 5.4267 + 91.1755 = 102.3083
ii. MP as on 31st Dec.15 at 5.14% = 6/ (1 +5.14%) + 6/ (1 +5.14%)^2 + l061 +5.14%)^2
p
= 5.7067 + 5.4277 + 91.2015 = 102.3359
BPV =ii -i =102.3359 - 102.3083 = + 0.0276
e
4 In this case' BPV will be equal to change in the market price as on 31st Dec.2015 at 7.25% & at 7.24%
(due to decrease by 1 bps). It is calculated as.
D
e
e
i. MPason315tDec.15at7.25%=8/ (1+7.25%) +8/ (1+7.25%)"2 + 8/ (1 +7.25%)^3 +8/ (1+7.25%)^4
H od a
+ 8/ (1+7.25%)^5 +108/ (1 +7.25%)^5
d
= 7.4592 + 6.9549 + 6.4848 + 6.0464 + 5.6377 + 70.9643 =103.5473
ii. MP as on 31st Dec.15 at 7.24% = 8/ (1 +7.24%) + 8/ (1 +7.24%)^2 + 8/(1 +7.24%)^3 +8/(l +7.24%)^4
o
p
p
+ 8/(1+7.24%)^5+108/(1 +7.24%)^5
d
= 7.4599 + 6.9563 + 6.4866 + 6.0487 + 5.6403 + 71.0040 =103.5958

o
d
D
D
BPV = ii -i = 103.5958- 103.5473 = + 0.0485
o
o
k
############################################################################
d
d
Lakshay Bank Ltd. invests in the following 3 Securities of Face Value of ₹ 1000 each as under.
k
p
k
Security- I Security- II Security- III

o
Amount 50000 30000 20000

D
Yield 5% 7% 9%
p
e
p
Risk Weight 30% 60% 100%

Tenure 7 Yrs. 7 Yrs. 7 Yrs.
k
k
d
e
1. What would be the average yield of all the 3 securities

D ep ak H o a
a
D e a
a) 5.9 %
p
b) 6.4 %
o
c) 6.9%
D e
d) 7.4 %
e
2. How much is the value of Risk Weighted Assets.

k
a) 51000
b) 52000
c) 53000
p
d) 54000
od
od
H od a
H od a
3. How much is the Capital Required if Capital Adequacy, Ratio is 9%.

k
a) 4770
k
D
o
b) 9000
o
c) 6885
od a d

k
Deepak Hooda
o D e ep
e
d) 5490
d) 988.75
c) 990.95
b) 975.95
a) 985.75
d) 968.95
c) 991.39
b) 958.97
a) 972.54
d) 1031.95
c) 1014.55
b) 1028.80
a) 1019.85
c) +0.3949
a) +0.4019
a) + 2.51%
d) (0.3949)
b) (0.4019)
d) (0.3949)
b) (0.4019)
b) (2.51% )
c) + 0.3949
a) + 0.4009
d) 5.21 Yrs.
c) 5.14 Yrs.
a) 4.98 Yrs.
d) 5.51 Yrs.
b) 5.41 Yrs.
a) 5.00 Yrs.
d) (2.655%)
b) 5.02 Yrs.
c) 5.31 Yrs.
c) + 2.655%
k o od
k
what would be its new price.

H od a p o
be the change in Basis Point Value.
be the change in Basis Point Value?

e
o e p k o d D
e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
5. If the yield of Security-III after l year is 8.37% what would be its price
4. If the yield of Security-I after 1 year is 5.83% what would be its price.
k o od e
k
10. If the yield of Security-I after 1 year is 5.83% what would be its Modified Duration.
9. If the yield of Security-I after 1 year is 5.83% what would be its Macaulay Duration.
H od a p o
11. What would be % Change in Price of Security-I after 1 year if the rate decreases by 50 bps.
6. If the yield of Security-III after 2 years increases by 100 basis points over the yield of year 1,

7. If the yield of Security –III after 2 years increases by 1 bps over the yield of year 1, what would
8. If the yield of Security-Hl after 2 years decreases by 1 bps over the yield of year 1, What would
19

e
p
e e p a k H oo da D
o
ep
o
p
20
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
++++++++++++++++++++++++++++++++++++
d
ep k H od a
ep k H od a
Please study the following table
o
Security- I Security- II Security- III
Amount 50000 30000 20000
Yield 5% 2500 7% 2100 9% 1800
o
o
Risk Weight 30% 15000 60% 18000 100% 20000
k
Tenure 7 Yrs. 7 Yrs. 7 Yrs.
1. Average Yield= (2500 + 2100 + 1800) / 100000 = 6.4%
p
2. Risk Weighted Assets= 15000 + 18000 + 20000 = 53000
e
3. Capital Required= 9% of RWAs = 9% of 53000 = 4770
D
4. In this case, Principal Amount= ₹ 1000/ Annual Yield = 5% of 1000 i.e., = ₹ 50
e
r = 5.83% i.e., the current market rate of interest, and
e
H od a
d
Market Price= 50/ (1 +5.83%) + 50/ (1 +5.83%)^2 + 50/ (1 +5.83%)^3 + 50/ (1 +5.83%)^4
+ 50/ (1 +5.83%)^5 + 50/ (l +5.83%)^5 +1050/ (l +5.83%)^6
o
p
= 50/ (1.0583) + 50/ (1.0583) ^2 +50/ (1.0583) ^3 + 50/ (1.0583) ^4 + 50/ (1.0583) ^5 + 50/ (1.0583)
p
d
^5+1050/(1.0583)
o
d
= 47.25 + 44.64 + 42. 18 + 39.86 + 37.67 + 747.37 + 958.97
D
D
5. In this case, Principal Amount= ₹ 1000

o
Annual Yield= 9% of 1000 i.e. = ₹ 90

k
d
r = 8.37% i.e., the current market rate of interest, and

d
k
p
k
Market Price= 90/ (1 +8.37%) + 90/ (1 +8.37%)^2 + 90/(1 +8.37%)^3 + 90/(1 +8.37%)^4 +
o
90/(1+8.37%)^5+1090/(1 +8.37%)^6
D
=90/ (1.0837) + 90/ (1.0837) ^2 + 90/ (1.0837) ^3 + 90/ (l.0837) ^ 4 + 90/ (1.0837) ^5 +1090/(1.0837) ^5
p
e
p
=83.05 + 76.63 + 70.72 + 65.25 + 60.21 + 672.94 = 1028.80

k
6. In this. case, P6ncipal Amount = ₹ 1000/

d
e
Annual Yield= 9% of 1000 i.e., = ₹ 90

D ep ak H o a
a
D e a
R=8.37% i.e., the current market rate of interest (Since the yield has increased by 100 bps over the yield
p
of year 1 which was 8.37%), and n = 5 years, remaining number of years.

o
D e
Market Price= 90/ (1 +9.37%) + 90/ (1 +9.37%)^2 + 90/ (l +9.37%)^3 + 90/ (1+9.37%)^4 +1090/ (1
e
+9.37%)^5
= 90/ (1.0937) + 90/ (1.0937) ^2 + 90/ (1.0937) ^3 + 90/ (1.0937) ^ 4 + 1090/ (1.0937) ^4
k
= 82.29 + 75.24 + 68.80 + 62.90 + 696.52 = 985.75
7. In this case BPV would be the change in Market Price after 2 years (remaining period 5 years) when
p
compared with the yield of 8.37% (yield of year 1) & when the yield increases by lbps i.e., it becomes
od
od
8.38% It is calculated as
H od a
H od a
k
a. MP for 5 yrs. at 8.37% = 90/ (1.0837) + 90/ (1.0837) ^2 + 90/ (1.0837) ^3 +

k
D
o
90/ (1.0837) ^ 4 + 1090/ (1.0837) ^5

o
= 83.0488 + 76.6345 + 70.7156 + 65.2539 + 729.2579 = 1024.9107

od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
21
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
d
ep k H od a
b. MP for 5 yrs. at 8.38% = 90/ (1.0838) + 90/ (1.0838) ^2 + 90/ (1.0838) ^3 + 90/ (1.0838) ^ 4 + 1090/
ep k H od a
(1.0838) ^5
= 83.0411 + 76.6204 + 70.6960 + 65.2298 + 728.9215 = 1024.5088
o
BPV = b - a= 1024.5088 - 1024.9107 = - 0.4019
8. In this case BPV would be the change in Market Price after 2 years (remaining period 5 years) when
o
o
compared with the yield of 8.37% (yield of 1 year) and when the yield decreases by 1 bps i.e., it becomes
k
8.36%. it is calculated as
a. MP for 5 yrs. at 8.37% = 90/ (1.0837) + 90/ (1.0837) ^2 + 90/ (1.0837) ^3 + 90/ (1.0837) ^ 4
p
+ 1090/ (1.0837) ^5
= 83.0488 + 76.6345 + 70.7156 + 65.2539 + 65.2539 + 729.2579 = 1024.9107
e
b. MP for 5 yrs. at 8.36% = 90/ (1.0836) + 90/ (1.0836) ^2 + 90/ (1.0836) ^3 + 90/ (1.0836) ^4
+ 1090/ (1.0836) ^5
D
= 83.0565 + 76.6486 + 70.7352 + 65.2539 + 729.5944 = 1025.3126
e
e
H od a
BPV = b - a= 1025.3126 – 1024.91.7 = + 0.4019
d
9. Investors are subject to 2 type of risk
i) Interest rate risk i.e., The risk of 'reinvestment rate of the annual interest to be received
o
p
p
ii) Risk of Capital Gain/ Loss on sale of the security at the end of the holding period. For any
d
investment there is a remaining period of holding when the loss on account of one risk is exactly balanced
o
d
D
by the gain on another risk. This remaining period of holding is called Duration. It is calculated as:
D
a. Calculate future cash flows to be received by holding the security
o
b. Reduce these cash flows to 'present value' at the discount rate & take their total
o
k
c. Multiply each of the 'present values' with the respective number of years left & take their total
d
d. Duration= Divide the total as at step 'c' with total as at step 'b', This is also called as 'McCulay Duration’
d
k
In the instant case, Cash Flows to be received are for 6 years, ₹ 50 for 5 years
p
k
o
& 1050 for the 6th year. Discount rate is 5.83%. Duration is calculated as
o
D
p
PVs = 47.25 + 44.64 + 42.18 + 39.86 + 37.67 + 747.37 = 958.97

e
p
Multiply with remaining respective number of years.

k
= 47.25 x l + 44.64 x 2 + 42.18 x 3 + 39.86 x4 + 37.67 x S +747.37 x 6

k
= 47.25 + 89.28 + 126.54 + 159.44 + 188.35 + 4484.22 = 5095.08

d
e
e
D ep ak H o a
a
D e a
p
McCulay Duration= 5095.08 / 958.97 = 5.313075 = 5.3131 Years

p
o
10 Modified Duration= McCulay Duration I (1 + Yield)

D e
= 5.31 / (l + 0.0583) = 5.31/ 1.0583 = 5.017

e
11. (% Change in Price= - Modified Duration x % Change in Yield)

k
= - 5.02 x-0.5 = + 2.51%
############################################################################
p
od
Followings are the details of 2 Bonds

od
H od a
H od a
k
Bond - I Bond - II
k
D
Face Value 100 100

o
Annual Coupon 8% 9%
od a d

k
Deepak Hooda
o D e ep
e
b) 17%
a) 10%
c) 17%
c) 17 %
c) 8.8 %
b) 2.36%
d) 3.05%
Market price
d) 12.5 %
b) 2.36 %
d) 3.05 %
d) 18.64%
b) 15.11%
a) 13.41%
a) (2.36%)
c) (3.05%)
d) 18.64 %
a) 13.41 %
b) 11.11 %
a) Bond - I
c) (3.05 %)
a) (2.36 %)
b) Bond - II
d) 3.46 Yrs.
b) 2.76 Yrs.
a) 2.36 Yrs.
d) 3.46 Yrs.
c) 3.05 Yrs.
a) 2.36 Yrs.
c) 3.05 Yrs.
b) 2.76 Yrs.
Term to Maturity
a) It will Increase
k o od
k
H od a p o
80
2. How much is the YTM of Bond - I
3. How much is the YTM of Bond - II.

when compared to Market Price of ₹ 80

3 Years
1. How much is the Current Yield of Bond - II.
4. How much is the McCulay Duration of Bond I .

d
5. How much is the Modified Duration of Bond - II .

a De ep ak Ho od a D ee pa k o D e e p a k H oo da D
k e
o e p o d D
8. As an investor in which Bond you would like to invest.

e p
Deepak Hooda
k e p k o d o D e
90
11. Market Risk
4 years
7: How much is the Change in Price of Bond-II, if YTM decreases by 1 % .

6. How much is the Change in Price of Bond - II, if YTM increases by 11Yo
k o od e
k
H od a p o

9. If yield on similar instruments comes down to 7%, how the Market Price of Bond – I will behave
22

e
p
e e p a k H oo da D
o
ep
o
p
23
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
b) It will Decrease
d
ep k H od a
c) No Change
ep k H od a
++++++++++++++++++++++++++++++++++++
o
1. Current Yield = Coupon amount / Market price
=10/90=11.11%
o
o
k
2 We can calculate YTM by applying by linear Interpolation
i. Suppose YTM is 16%, value of 'r' will be 16%.
MP= 8/ (1+16%) + 8/ (1+16%)^2 + 108/ (1+16%)^3
p
=6.90+5.94+69.19=₹ 82.03
ii. Suppose YTM is 18%, value of 'r' will by 18%.
e
MP = 8/ (1 + 18 %) + 8/ (l + 18%)^2 + 108/ (1+18%)^3
= 6.78 + 5.74 + 65.73 = 78.23
D
e
YTM = 16 + (18 - 16) x [ (82.03 - 80) / (82.03 - 78.25)]
e
H od a
= 16 + 2 x (2.03 /3.78) = 16 + 2 x 0.53703 = 16 + 1.07 = 17.07% i.e., 17%
d
Method - II Apply the formula
o
p
p
YTM = Coupon Amount + (Redemption Amount-MP) / Term to Maturity % .
d
o
d
---------------------------------------------------------------------
D
D
(Redemption Amount + MP) /2
o
(8+(100-80)/3)/ ((100 + 80) / 2) = (8+6.67)/90=16.3%

k
d
d
3 Method I We can calculate YTM by applying Linear Interpolation
i. Suppose YTM is 16%, value of 'r' will be 16%.
k
p
k
MP= 10/ (1+16%) + 10/ (1+16%)^2 + 10/ (1+16%)^3 + 110/ (1+16%)4

o
= 8.62 + 7.43 + 6.41 + 60. 75 = 83.21

D
ii. Suppose YTM is 13%, value of 'r' will be 13%.

p
e
p
MP= 10/ (1+13%) + 10/ (1+13%)^2 + 10/ (1+13%)^3 + 110/ (1+13%)^4

= 8.85 + 7.83 + 6.93 + 67.47 = ₹ 91.08
k
YTM = 13 + (16 - 13) x [ (91.08 - 90) I (91.08 - 83.21)]

d
e
= 13 + 3 x (1.08 I 7.87) = 13 + 3 x 0.1372 = 13 + 0.41 = 13.41 %

e
D ep ak H o a
a
D e a
p
Method-II Apply the formula

o
D e
YTM = Coupon Amount + (Redemption Amount-MP) / Term to Maturity %.

e
---------------------------------------------------------------
e
(Redemption Amount + MP) /2

k
= 10 + (100 - 90) / 4 (100 + 90) / 2

= (10 + 2.50) / 95 = 13.16 %
p
od
od
H od a
4 Cash Flows to be received are for 3 years, ₹ 8 for 2 year & ₹ 108/ for the 3rd year. Discount rate
H od a
k
is 17%. Present Values are calculated and are as under.

e
k
D
o
a. PVs = 8/ (1 + 17%) + 8/ (1 + 17%)^2 + 108/ (1 + 17%)^3

od a d

k
Deepak Hooda
e
p
e e p a k H oo da D
o
ep
o
p
24
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
= 6.84 + 5.84 + 67.43 = ₹ 80.11
d
ep k H od a
ep k H od a
b. Multiply with remaining respective number of years.
= 6.84 x 1 + 5.84 x 2 + 67.43 x 3
o
= 6.84 + 11.68 + 202.29 = 220.81
c. McCulay Duration= 220.81 / 80.11 = 2.76 Years

o
o
k
5 Cash Flows to be received are for 4 years, 10 for 3 year & ₹ 110 for the 4th year. Discount rate is
13 .41 %. Present Values are calculated and are as under.
a. PVs = 10/ (1 + 13.41 %) + 10/ (1 + 13.41) ^2 + 10/ (1+13.41 %) ^3 + 110/ (1+13.41%)^4
p
= 8.82 + 7.77 + 6.86 + 66.49 = ₹ 89.94
b. Multiply with remaining respective number of years.
e
= 8.82 x 1 + 7.77 x 2 + 6.86 x 3 + 66.49 x 4
= 8.82 + 15.54 + 20.58 + 265.96 = 310.90
D
e
e
c. McCulay Duration= 310/89.94 = 3.4567 Yrs.= 3.46 Years
H od a d
d. Modified Duration = McCulay Duration / (1 + Yield)
=3.46 / (1+13.41 %) = 3.46 / 1.1341 = 3.05 Yrs.
o
p
p
6 Expected % Change in Price = - Modified Duration x % Change in Yield
d
= - 3.05 x - 1 = 3.05 %
o
d
D
7 Expected % Change in Price

D = - Modified Duration x % Change in Yield
o
= - 3.05 x - 1 = 3.05 %
o
k
d
8 As an investor I would like to invest in Bond- I since YTM on Bond - I

d
(17%) is more than the YTM on Bond- II (13.41 %).
k
p
k
o
9 Market Rate of Interest & the Market Price of the bond are inversely related.
o
If rates of interest come down, the price increases. If Rate of interest comes down to 7 % and the Coupon
D
p
Rate or the Rate of interest on Bond-I is 8%, the price of the bond will naturally increase.
e
p
k
############################################################################
k
d
e
Bank holds 3 years bonds with face value of ₹ 1000 and coupon rate of 6% payable yearly. The
e
D ep ak H o a
a
current yield is 10% on this bond. Calculate Macaulay's duration, Modified Duration, Price change
D e a
p
p
o
D ee
e
p k
od
od
H od a
H od a
k
k
D
o
o
od a d

k
Deepak Hooda
2010:
o D e
GOI bonds.
ee pa H oo da D e a H o a De ep ak H o a e ep
a) ₹ 95.20
b) 11 paise
c) 12.5 paise
b) 13.1 paise
9% GOI Bond 18
7% GOI Bond 16
9% GOI Bond 18
7% GOI Bond 16
a) 14.5 paise
Due to change in
rounded off to 27 p.
d) 11.90 paise
a) 10.02 paise
d) 12.34 paise
c) 11.29 parse
during this period?
during this period?
k o od
k
At par
At par
At Par
At Par
Macaulay's duration = 2.82 year
FV
p o
New price = 900.52 + 27P = 900.79

H od a
e p k
7.65%
7.32%
7.34%
7.12%
od a o d D ee pa k H oo da D e a H oo da
o d D e e p a k H oo da D
Yield
o e p k o d D e
If current yield changes to 9.90%, the new price of bond shall be
e p = Modified duration x change in yield = 2.6643 x 10 BPS = 26.64 p
Deepak Hooda
k e p k o d o D e
(Refer the abovementioned Example to arrive at Macaulay’s Duration)
11. Market Risk
120.50
105.80
124.00
108.40
Champak Bank an investment in bonds as under, on Sept 30, 2009:
Price
Modified duration = Macaulay's duration / 1+ yield = 2.82 / 1.06 = 2.6643 years
k o od e
k
p o
120500
105800
124000
108400
H od a
############################################################################

Cost
yield of these securities, the yield and price changed as under as on Mar 31,

03 If there is increase in yield by 100 basis points during this period, what will be the price of 7%
01 What is the change in basis point value for each basis point increase in yield for 7% GoI bonds
02 What is the change in basis point value for each basis point increase in yield for 9% GOI bonds
25

e
p
e e p a k H oo da D
o
ep
o
p
26
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
b) ₹ 93.90
d
ep k H od a
c) ₹ 92.10
ep k H od a
d) no change will take place
o
04 If there is increase in yield by 100 basis points during this period, what will be the price of 9%
GOI bonds.
a) ₹ 112.71
o
o
b) ₹ 111.96
k
c) ₹ 111.12
d) ₹ 110.87
p
05 The bank decides to sell the 7% Gel bonds on Mar 31, 2010 itself, to stop the loss. How much it
will lose on this sale transaction ?
a) ₹ 1210
e
b) ₹ 1670
c) ₹ 2400
d) ₹ 2600
D
e
e
H od a
06 The bank decides to sell the 9% Go! bonds on Mar 31, 2010 itself, to stop the loss. How much it
d
will lose on this sale transaction
a) ₹ 3500
b) ₹ 3100
o
p
c) ₹ 2800
p
d
d) ₹ 2600
o
d
D
D
++++++++++++++++++++++++++++++++++++
o
1. (108.40 - 105.80) / (7.32 - 7.12) = ₹ 2.90 / 20 = 14.5 paise

k
d
d
2 (124 - 120.50) / 7.65-7.34) = ₹ 3.50 / 31 = 11.29 paise
k
p
k
3. Change for one basis points = (108.40 - 105.80) / (7.32 - 7.12) , ₹ 2.90 / 20 = 14.5 paise. Change for
o
100 basis points = 14.5p x 100 = ₹ 14.50.

D
Hence. value after change = 108.40 - 14.50 = ₹ 93.90

p
e
p
4. Change for one basis points = (124 - 120.50) I 7.65-7.34) = ₹ 3.50 / 31 = 11.29 paise. Change for 100
k
basis points = 11.29 x 100 = ₹ 11.29.

d
e
Hence changed value= 124.00 -11.29= ₹ 112.71

e
D ep ak H o a
a
D e a
p
5. 108400 - 105800 = 2600

o
D e
6- 124000 - 120500 = 3500

e
############################################################################
k
Champak Bank an investment in bonds as under, on Sept 30, 2009:
FV Yield Price Cost

p
9% GOI Bond 16 At par 8.40% 107.60 215200

od
od
11% GOI Bond 18 At Par 8.80% 110.50 221000

H od a
H od a
Due to change in yield of these securities, the yield and price changed as under as on Mar 31,
k
2010:
D
o
9% GOI Bond 16 At par 8.20% 109.80 105800

od a d

k
Deepak Hooda
18
o D e
GOI bonds.
ee pa H oo da D e a H o a De ep ak H o a e ep
% GOI bonds.
d) ₹ 5600
c) ₹ 5400
b) ₹ 4670
a) ₹ 4210
d) ₹ 3750
c) ₹ 3800
b) ₹ 4000
a) ₹ 4200
b) 13 paise
a) 12 paise
c) 10 paise
a) 12 paise
11% GOI Bond
d) ₹ 124.50
c) ₹ 119.10
b) ₹ 109.90
a) ₹ 105.20
c) ₹ 114.80
b) ₹ 116.90
a) ₹ 118.60
c) 14 paise
b) 11 paise
d) no change
d) no change
d) no change
during this period?

pa k H o oda D ee pa k H oo da D eep ak H oo da De ep ak during this period?
k o od
k
At Par

H od a p o
d D
++++++++++++++++++++++++++++++++++++
e p k
8.60%
o d
Change for 100 basis points = 11 x 100 = ₹ 11.00.

od a D ee pa k H oo da D e a H oo da
e
k e p k d
2. (113.30- 110.50) / (8.80 - 8.60) = ₹ 2.80 / 20 = 14 paise

e p o D
1- (109.80 - 107.60) / (8.40 - 8.20) = ₹ 2.20 / 20 = 11 paise

H od a
D ep ak H o a o
e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
p
113.30
k
itself, to make the profit. How much profit it will be able to make on this sale?
itself, to make the profit. How much profit it will be able to make on this sale?
k o od e
D e a p o d D ee a H oo da D e a H
k
3. Change for one basis points = (109.80 - 107.60) / (8.40 - 8.20) = ₹ 2.20 I 20 = 11 paise.
p o
226600
H od a
What is the change in basis point value for each basis point increase in yield for 9% GOI bonds

oo da D ee pak H oo da De ep ak Ho od a De ep ak Ho od 05 Due to expected adverse change, the bank decides to sell the 9% GOI bonds on Mar 31, 2010
04 If there is decrease in yield by 100 basis points during this period, what will be the price of 11
06 Due to expected adverse change, the bank decides to sell the 11% GOI bonds on Mar 31, 2010
What is the change in basis point value for each basis point increase in yield for 11 % GOI bonds
03 If there is decrease in yield by 100 basis points during this period, what will be the price of 9%
27

e
p
e e p a k H oo da D
o
ep
o
p
28
11. Market Risk

D
e
e

e
D
D
e ep k Ho od a
Hence value after change= 107.60 + 11.00 = ₹ 118.60
d
ep k H od a
ep k H od a
4. Change for one basis points = (113.30 - 110.50) / (8.80 - 8.60) = ₹ 2.80 / 20 = 14 paise.
Change for 100 basis points= 14 x 100 = ₹ 14.00.
o
Hence value after change= 110.50 + 14.00 = ₹ 124.50
5. 219600 - 215200 = 4200

o
o
·
k
6- 226600 - 221000 = 5600
############################################################################
p
VaR ₹ 5 Lac with 95% confidence level. If there are 250 trading days in a year.
1. How many days in a year there is a possibility of loss of ₹ 5 Lac or more. - 12.5
e
D
2. How many days in a year there is a possibility of loss of less than ₹ 5 Lac. - 237.5
3. How many days in a year there is not a possibility of loss of ₹ 5 Lac or more. - 237.5
4. How many days in a year there is a not a possibility of loss of less than ₹ 5 Lac. - 12.5
e
e
H od a
5. How many days in a year there is not a possibility of loss of not of ₹ 5 Lac or more - 237.5
d
6. How many days in a year there is a not a possibility of loss of not less than ₹ 5 Lac. -12
++++++++++++++++++++++++++++++++++++
o
p
p
The above statement means
d
a. The possibility of loss of ₹ 5 Lac or more

o
d
b. Confidence level of 95% means that the possibility of loss of less than ₹ 5 lakh means that the
D
D
possibility of loss of ₹ 5- Lac or more is only-5%;
o
o
k
############################################################################
d
d
You have a $1,000 par value 6%-annual coupon bond matures in 2 years yielding 6.2%. Calculate
the bond’s modified duration and expected percentage change in bond price given a 0.5%
k
p
k
decrease in yield.
o
o
D
++++++++++++++++++++++++++++++++++++
p
e
p
We first need to calculate the Macaulay’s duration, which is the average maturity of the bond cash flows
k
weighted based on their relevant contribution to the present value of the bond.
k
d
e
e
D ep ak H o a
a
D e a
p
p
o
D ee
Modified duration equals Macaulay’s duration divided by (1 + y/m):

p k
od
od
H od a
H od a
Modified duration works out to 1.83 which means the bond prices increases (decreases) by 1.83% given
k
k
D
a 1% decrease (increase) in bond price.

o
The percentage bond price change given a 0.5% decrease in yield equals 0.915% (i.e. -1.83×(-0.5%)).
od a d

k
Deepak Hooda
where
o D e ep
pa k H o da D ee pa k H oo da D ep ak H oo da De ep ak e
bonds in the portfolio.

k o od
k
Di = modified duration of bond i

H od a p o
K = number of bonds of the portfolio.

bond B = 84.89 x 5,000,000/100 = 4,244,500

d
bond A = 101.43 x 3,000,000/100 = 3,042,900
bond C = 121.87 x 8,000,000/100 = 9,749,600

D
++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++
od a e p k o d D
The portfolio dollar duration of a basis point (DV01)

o d
Based on the above, the market values are as follows:

D e e p a k H oo da D
wi = market value of bond i/market value of the portfolio

o e p k o d D e
what will be risk of the portfolio consisting of two stocks?
= (portfolio modified duration X market value of portfolio)/10,000

Mathematically, it is as follows: w1D1 + w2D2 + w3D3 +…+wkDk,

e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
k o od e
k
H od a p o
############################################################################
############################################################################

MS. MOUSHIP holds a portfolio consisting of two stocks-stock A and stock B. Stock A has a
co-efficient of the two stock returns is 0.50. If MS. Mouship holds equal amount of each stock,

standard deviation of returns of 0.6 and stock B has a standard deviation of 0.80. The correlation
The portfolio modified duration is obtained by taking the weighted average of the modified duration of the
29

o D e ep
from the delta.

k o od
k
17,037,000)/10,000 = 8,584

H od a p o
= 0.4215 + 1.0289 + 3.5881 = 5.0385
The 1 day 95% VaR is 2.4 × 1.65 = $3.96.

e
o e p k o d D
of x is 0.02. It follows that the standard deviation of P is 2.4.
e p
Deepak Hooda
k e p k o d o D e
11. Market Risk
Portfolio modified duration is calculated as follows: (3,042,900/17,037,000)2.36 +
k o od e p k o d D ee a H oo da D e a H
Total market value of the portfolio = 3,042,900 + 4,244,500 + 9,749,600 = 17,037,000
D e a k
p o
An approximate relationship between the daily change in the value of the portfolio, P and the
Therefore, the portfolio dollar duration of a basis point (DV01) is obtained as follows: (5.0385 x
H od a
############################################################################

proportional daily change in the value of the asset x is P = 10 × 12x = 120x The standard deviation
(4,244,500/17,037,000)4.13 + (9,749,600/17,037,000)6.27 = (0.1786)2.36 + (0.2491)4.13 + (0.5723)6.27
Consider a portfolio of options on a single asset. Suppose that the delta of the portfolio is 12, the value of
the asset is $10, and the daily volatility of the asset is 2%. Estimate the one-day 95% VaR for the portfolio
30


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oo a D ee pak k H oo da De eep ak Ho ood da De ep ak Ho od

k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H

D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

b) ₹ 200 per shares

04. The defeasance period in this transaction is:

5. What is the value at risk (VaR) in this transaction:

The stock price is known as market factor.

This is called volatility i.e. daily fluctuation.

The defeasance period represents the daily fluctuation period.

Ultimate Study Material is Macmillan Book Only

k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H

D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

2. In the worst case scenario, the prospective:

a) there is 5% possibility for the yield to be higher than 0.70%

Based on previous 60 days' trading data, the following information is available:

Volatility per day = 2% (i.e. about 32% per year 2 x 252)

No. of observations (N) = √10

Confidence level = 99%

Investment amount= ₹ 60000

Standard deviation of change in market price = ₹ 1200/day (60000 x 2%)

Standard deviation of change in 10 days = ₹ 1200 x √10 = 3794.73

Assumed that expected change in the value of bank's share is zero.

Hence at 99% confidence level, Z value as per Table is

Ultimate Study Material is Macmillan Book Only

k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H

D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

to fluctuate 2% daily, he estimates daily potential loss of ₹ 32800, at 96% confidence.

for above stock would be

Variance scales in proportion to time.

So variance gets multiplied by 10

= (100) (3.16) = 316

(σN2 = σ12 + σ22 ….. = Nσ2)

Ultimate Study Material is Macmillan Book Only

k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H

D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

1 0002  1 0002  2  03 1 000 1 000  2 600 000

The standard deviation of the 5-day change is

From the tables of N ( x ) we see that N(−2.326)=0.01.

The 5-day 99 percent value at risk is therefore 2.326×3,605.55 = $8,388.

VAR for 10 day horizon.

σ =1%=(.01) (5,000,000)= $ 50,000

Daily VAR=(2.33) (50,000)= $ 116,500

10 day VAR =$ 116,500x √10= $ 368,405

Ultimate Study Material is Macmillan Book Only

k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H

D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

Worst YTM = actual YTM + 1.65 x Volatility

VAR = $10,000,000* 0.02*3.6* √10/252 * 2.33 = $334,186

per Euro. Find daily VAR at 99% confidence level.

VAR = (2.33) [(.12)/√252] × (125,000 × 1.05) = $ 2310

Ultimate Study Material is Macmillan Book Only

k Ho od a D ee pa k H Hoo oda a D ee pak k H oo da De eep pak H

D eep pak k H oo da De ep ak Ho ood a D De epa ak Ho od a

that yield changes will be greater than this maximum?

d. What is the daily earnings at risk for this bond?

DEAR = ($ value of position) x (price volatility) = $1,000,000 x 0.009252 = $9,252

points. What is the profit or loss suffered due to increase in yield?

(a) A profit of ₹ 1000

(b) A loss of ₹ 1000

(d) A loss of ₹ 625

(a) 5.05 years

(d) 6.00 years

The current yield is 10% on this bond.

VAR = $10,000,000* 0.023.6 √10/252 * 2.33 = $334,186