# Question

A bank has written European a call option on one stock and a European put option on another stock. For the first option, the stock price is 50, the strike price is 51, the volatility is 28% per annum, and the time to maturity is nine months. For the second option, the stock price is 20, the strike price is 19, the volatility is 25% per annum, and the time to maturity is one year. Neither stock pays a dividend, the risk-free rate is 6% per annum, and the correlation between stock price returns is 0.4. Calculate a 10-day 99% VaR

(a) Using only deltas.

(b) Using the partial simulation approach.

(c) Using the full simulation approach.

(a) Using only deltas.

(b) Using the partial simulation approach.

(c) Using the full simulation approach.

## Answer to relevant Questions

A common complaint of risk managers is that the model-building approach (either linear or quadratic) does not work well when delta is close to zero. Test what happens when delta is close to zero in using Sample Application E ...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%. What is the total ...Suppose a three-year corporate bond provides a coupon of 7% per year payable semiannually and has a yield of 5% (expressed with semiannual compounding). The yields for all maturities on risk-free bonds is 4% per annum ...Explain carefully the distinction between real-world and risk-neutral default probabilities. Which is higher? A bank enters into a credit derivative where it agrees to pay $100 at the end of one year if a certain company’s ...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 offer $35. What are the proportional bid–offer ...Post your question

0