Sell-IT is an on-line retail business and a subsidiary of Trade Corp. Its computer systems have suffered a number of significant recent failures. The CFO assesses that the impact of future such events is forecast to result in a reduction in value of $18,000 over a full year and that the statistical patterns of the potential volatility, measured as the standard deviation of the firm’s value, could be $900,000 per annum. The projected annual profit of Sell-IT, paid to Trade Corp at the end of the year as a dividend, is $136,250. Trade Corp’s cost of funds is 5.5%pa.

What is the Annual Value at Risk (VaR; rounded to the nearest $), if the company uses a 95% confidence level based on a normal distribution?

Select one:

a. 1.050,000

b. 1,202,500

c. 1,485,000

d. 1,780,500

e. 2,097,000

What is Trade Corp’s Risk-Adjusted Return on Capital (RAROC; rounded to 1 decimal place) on its investment in Sell-IT, using the VaR that you calculated?

Select one:

a. 5.6%pa

b. 6.7%pa

c. 7.9%pa

d. 8.4%pa

e. 9.1%pa

Answer rating: 100% (QA)

ANSWER Question 21 We are calculating Annual Value at Risk VaR rounded to the nearest if ... View the full answer