1. Stock price today at $100. A binary PUT with strike of 85 is priced at $0.15. What is the implied standard deviation?

2. Value at Risk (VaR)

A VaR is the loss a portfolio is expected to lose at a certain frequency. For example a 1% VaR is expected to happen at 1% frequency, or once every 100 time periods.

A strategy you developed is expected to generate 10 bps of mean return with 100 bps of stdev for return at daily frequency.

a. If you manage $100M, What is $ value for 5%, 1%, and 0.1% VaR for the strategy on a daily basis?

b. If your trading desk's 1% VaR is set at $10M by the chief risk officer of the company, how much money can you deploy for your strategy?

Answer rating: 100% (QA)

1 The implied standard deviation is 15 Let P be the price of th... View the full answer