Compute the Value-at-Risk (VaR) of a six-month forward contract. The transaction

requires the investor to deliver $12.7 million in 180 days and receive 10 million in

exchange. Assume that the current spot rate is $1.26/1 and the annualized interest

rate is 4% on a six-month zero coupon bond and 3% on a six-month zero coupon Euro

bond.

Again, assume the variance/co-variance matrix (on daily returns) across those

instruments are as follows:

Six-Month $ Bond Six-Month $ Bond Six-Month $ Bond

Six-Month $ Bond 0.0000314

Six-Month Bond 0.0000043 0.0000260

Spot $/ Rates 0.0000012 0.0000013 0.0000032

(a) Compute the value of the short position in the zero coupon dollar bond.

(b) Compute the value of the long position in the zero coupon euro bond (in $ terms),

holding spot rate fixed.

(c) Compute the VaR for this forward Contract.

(d) Compute the daily VaR for this forward contract assuming returns are normally

distributed with a 90% confidential interval