a) . Consider a portfolio of 20 domestic stocks with $10m in each stock. Explain how you
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Question:
a). Consider a portfolio of 20 domestic stocks with $10m in each stock.
Explain how you can use the variance-covariance (VCV) method and the single index model (SIM) to calculate the Value at Risk (VaR) for the above portfolio at the 5th percentile, over a 10-day horizon. Explain any assumptions you make and the possible risks in the hedge.
(You may use illustrative numbers and equations where appropriate).
b)You hold 100 long calls (on stocks-XYZ) each with a delta= +0.8, gamma= 0.1 and vega= 0.15. You also hold 50 stocks-XYZ.
Explain the steps required when using Monte Carlo Simulation (MCS) to obtain the 10-day VaR of this portfolio (at the 1stpercentile).
Explain the source of any potential weaknesses in this approach.
Expert Answer:
a Value at Risk VaR calculation using VCV and SIM To calculate the VaR using the VCV and SIM methods we need to make the following assumptions 1 The p... View the full answer
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