Monte Carlo Simulation to estimate market risk Suppose a financial institution has a long position in...

  

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Monte Carlo Simulation to estimate market risk Suppose a financial institution has a long position in a one-year, zero-coupon GBP bond at the price of 1,000. The current $/ exchange rate is 1.35. The FI wants to evaluate at value at risk for the bond at the 1-day interval. Historically, the price of zero-coupon GBP bond has a mean of 800 and a standard deviation of 10. The exchange rate has a mean of 1.15 and a standard deviation of 0.01. Use Monte Carlo Simulation to estimate the 1-day value at risk at the 10% level (i.e. the loss of the financial institution's long position in the GBP bond in the adverse situation that happens 10% of the time.) For simplicity, you can simulate the observations for 50 times. Please report the following results. You can either copy and paste the excel sheet into a word file, or you can submit the excel sheet itself: 3.1 The excel sheet with all the 50 simulated observations for all the variables you need to calculate the VAR. 3.2 The formula you use in the cells for the simulation. (You only need to report the formula in the top cell of the column if the rest is copied from the top cell.) 3.3 The mean and the standard deviation for the simulated values of the GBP bond in U.S. dollars. 3.4 The 1-day VAR at the 10% level. Monte Carlo Simulation to estimate market risk Suppose a financial institution has a long position in a one-year, zero-coupon GBP bond at the price of 1,000. The current $/ exchange rate is 1.35. The FI wants to evaluate at value at risk for the bond at the 1-day interval. Historically, the price of zero-coupon GBP bond has a mean of 800 and a standard deviation of 10. The exchange rate has a mean of 1.15 and a standard deviation of 0.01. Use Monte Carlo Simulation to estimate the 1-day value at risk at the 10% level (i.e. the loss of the financial institution's long position in the GBP bond in the adverse situation that happens 10% of the time.) For simplicity, you can simulate the observations for 50 times. Please report the following results. You can either copy and paste the excel sheet into a word file, or you can submit the excel sheet itself: 3.1 The excel sheet with all the 50 simulated observations for all the variables you need to calculate the VAR. 3.2 The formula you use in the cells for the simulation. (You only need to report the formula in the top cell of the column if the rest is copied from the top cell.) 3.3 The mean and the standard deviation for the simulated values of the GBP bond in U.S. dollars. 3.4 The 1-day VAR at the 10% level.

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To estimate the 1day value at risk VaR using Monte Carlo simulation you can follow these steps 1 Cre... View the full answer