Question: A pension plan has a position in bonds worth $4 million. The effective duration of the portfolio is 3.70 years. Assume that the yield curve

A pension plan has a position in bonds worth $4 million. The effective duration of the portfolio is 3.70 years. Assume that the yield curve changes only in parallel shifts and that the volatility of the yield (standard deviation of the daily shift size) is 0.09%. Use the duration model for estimating volatility of the portfolio and estimate the 20-day 90% Value at Risk for the portfolio. The 90th percentile of the standard normal distribution is 1.282, assume the parametric VaR model. [15 marks]

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