A portfolio of annual coupon bonds is valued at $100. The modified duration of the bond portfolio,
Question:
A portfolio of annual coupon bonds is valued at $100. The modified duration of the bond portfolio, i.e., duration/(1+yield), is 8 years. Based on the past 2-year daily data, a risk management team estimates the following statistics for the daily yield changes: the distribution of the daily yield changes is normally distributed with a mean = -0.2% and standard deviation = 0.1%.
Suppose BFM bank holds a LONG position in the portfolio and assume the daily yield changes follow a normal distribution. What is the DEAR under 5-percent most adverse market movement scenario?
(Please only provide the magnitude of DEAR, i.e. without a minus sign and round your answer to two decimal places)
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair