Suppose a Basel II regulated bank holds two stocks, B1 and B2, where the conditional return...
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Suppose a Basel II regulated bank holds two stocks, B1 and B2, where the conditional return mean vector for those two stocks is t (0.0002, 0.0003)' and the conditional 0.0002 0.0000004 covariance matrix is t = (0.000 = 0.0000004 0.0003 The prices of the two stocks are P = (10, 20)'. Over the past two years the bank has violated its risk limit two times. 1. Suppose you hold 1 share of each stock. i. What is the amount of risk, measured according to the Basel II standard? ii. What is the minimum market risk capital the bank will have to hold? 2. Suppose the bank also holds an at the money put option on stock B1. i. Would the risk be lower or higher than the answer you reached in the question above? ii. Outline how you would calculate the risk forecast in this case. Suppose a Basel II regulated bank holds two stocks, B1 and B2, where the conditional return mean vector for those two stocks is t (0.0002, 0.0003)' and the conditional 0.0002 0.0000004 covariance matrix is t = (0.000 = 0.0000004 0.0003 The prices of the two stocks are P = (10, 20)'. Over the past two years the bank has violated its risk limit two times. 1. Suppose you hold 1 share of each stock. i. What is the amount of risk, measured according to the Basel II standard? ii. What is the minimum market risk capital the bank will have to hold? 2. Suppose the bank also holds an at the money put option on stock B1. i. Would the risk be lower or higher than the answer you reached in the question above? ii. Outline how you would calculate the risk forecast in this case.
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