Suppose a Financial Institution has a portfolio which consists of +240 pounds(+ means long) of Copper and -135 pounds(negative means short) of Aluminium. The prices of Copper and Aluminium are both denominated in Euro(€). The current price of Copper and Aluminium are €210 per pound and €195 per pound respectively. The current exchange rate between Euro and US is 1.20 $/€. The daily change of the price of Copper, the price of Aluminium, and the exchange rate($/€), follows the normal distribution, the means and standard deviations are as follows:

Using the RiskMetrics model, find the 99% DEAR of the portfolio in USD.

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Daily Change Price of Copper Price of Aluminium Exchange rate (US $/€) Mean €0 per pound €0 per pound 0 $/€ Standard Derivation €0.8 per pound €1.2 per pound 0.06 $/ € Daily Change Price of Copper Price of Aluminium Exchange rate (US $/€) Mean €0 per pound €0 per pound 0 $/€ Standard Derivation €0.8 per pound €1.2 per pound 0.06 $/ €

Answer rating: 100% (QA)

The Daily Earnings at Risk DEAR for a portfolio in the RiskMetrics model is typically calculated as DEAR ValueatRisk VaR z Standard Deviation of the Portfolio where z is the zscore corresponding to th... View the full answer