N1569
BSc EXAMINATION
Financial Risk Management
There are FIVE questions and each has FOUR parts. Each part carries 5 marks.
Each question should take you 24 minutes, so 6 minutes per part.
1. (a) You want to measure the market risk of a portfolio containing hundreds of cash
flows. How would you select the risk factors, and how would you map the cash flows to these risk factors?
(b) Given the 15-month interest rate is 3.5% per annum and it has a volatility of 60
basis points (bps), find the present value (PV) and the present value of a basis point (PV01) of a cash flow of $3m 15 months from now. Justify your answers.
(c) Use the appropriate Excel workbook to map this cash flow to vertices at 1 and 2
years, in such a way that both PV and volatility are preserved under the mapping.
You are given that the 1-year rate is 4% and has volatility 65 bps, the 2-year rate is 3% and has volatility 50 bps, and the correlation between the 1-year and 2-year rates is 0.9. JUstify your answer.
(d) Use the appropriate Excel workbook to calculate the present value of a basis point (PV01) of the mapped cash flows in part (c) and comment on your results.
2. (a) Which model would you use to measure Value-at-Risk (VaR) for an equity portfolio and why?
(b) What issues would you expect to arise from this choice, if any?
(c) Calculate the 1% daily historical VaR of the S&P500 index using daily returns
between 1 January 2010 and 31 December 2023. How does this compare with the normal VaR? Give your answers as a % of the portfolio value.
(d) Scale this 1% daily VaR to a 10-day VaR under the assumption that the daily returns on the S&P 500 are independent and identically distributed. Would the scaled VaR remain unchanged if you were to assume the daily returns were positively autocorrelated? Justify your answer.