Question: Question 2 A firm holds a bond with a value of $150 million and an estimated probability of default of 4% over the coming 12

Question 2

A firm holds a bond with a value of $150 million and an estimated probability of default of 4% over the coming 12 months. The policy of the firm sets its risk limit to 95% VaR (Value at Risk) and 95% ES (expected shortfall) for any individual security. Assume the bond bears no risk of loss due changes in the market price or in the traded value.

(a) Compute the 95% ES measure for this bond and explain your result. (10 marks)

(b) Assume now that the confidence level is increased to 99% on both limits. Compute the new VaR and ES measures and explain your results.

(5 marks)

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