Required i) Carefully explain the steps you would take to calculate the 10-day VaR (5th percentile,...

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Required i) Carefully explain the steps you would take to calculate the 10-day VaR (5th percentile, in US dollars) for this portfolio, using the single index model (SIM) and the variance- covariance VCV approach. (Use the above illustrative figures in your answer). ii) How would you test the statistical adequacy of your VaR model over the period 2010- 2017? (25%) b) You hold a portfolio of 1000 European call options (with current price $10) on stock-A and 2000 (European) put options (with current price $15) on stock-B. You have data over the period 2010-2017. Required i) Explain the steps you would take when using "bootstrapping" to estimate the 5-day VaR (5th percentile) of the above portfolio. ii) Critically compare the bootstrapping method to the VCV method for this portfolio of options. (25%) c) You hold 1000 put options-A (current price, PA=$10) on stock-A (current price, SA = $90) and 2000 stocks-B (current price, SB=$8). The put options have 60 days to maturity and are currently at-the-money. A = 30. The portfolio delta and gamma for a long position in the option are A = -400 and The mean growth rate and volatility for stock-A are 5% pa and 15% pa, respectively and for stock-B the figures are 10% pa and 20% pa, and the correlation between the two stock returns is 0.7. Required i) Outline the steps you would take to calculate the 25-day VaR of this portfolio using Monte Carlo Simulation (MCS). How might you amend the MCS if the distribution of stocks-B have fat tails? ii) How would your analysis change if the 2000 of stock-B are UK stocks? (25%) Required i) Carefully explain the steps you would take to calculate the 10-day VaR (5th percentile, in US dollars) for this portfolio, using the single index model (SIM) and the variance- covariance VCV approach. (Use the above illustrative figures in your answer). ii) How would you test the statistical adequacy of your VaR model over the period 2010- 2017? (25%) b) You hold a portfolio of 1000 European call options (with current price $10) on stock-A and 2000 (European) put options (with current price $15) on stock-B. You have data over the period 2010-2017. Required i) Explain the steps you would take when using "bootstrapping" to estimate the 5-day VaR (5th percentile) of the above portfolio. ii) Critically compare the bootstrapping method to the VCV method for this portfolio of options. (25%) c) You hold 1000 put options-A (current price, PA=$10) on stock-A (current price, SA = $90) and 2000 stocks-B (current price, SB=$8). The put options have 60 days to maturity and are currently at-the-money. A = 30. The portfolio delta and gamma for a long position in the option are A = -400 and The mean growth rate and volatility for stock-A are 5% pa and 15% pa, respectively and for stock-B the figures are 10% pa and 20% pa, and the correlation between the two stock returns is 0.7. Required i) Outline the steps you would take to calculate the 25-day VaR of this portfolio using Monte Carlo Simulation (MCS). How might you amend the MCS if the distribution of stocks-B have fat tails? ii) How would your analysis change if the 2000 of stock-B are UK stocks? (25%)

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VaR Calculation and Model Testing a VaR using Single Index Model SIM and VarianceCovariance VCV Approach i Steps Data Collection Gather historical daily closing prices for the underlying assets stock ... View the full answer