(RiskMetrics) The trading book portfolio of financial institution C consists of• A coupon bond investment with 5 years to maturity, face value $1 million,coupon rate 4%, and coupon is paid once per year;• 0.2 million shares of stock X;• a foreign cash deposit of £2 million.The current market yield for the coupon bond is 2.5%. The institution choosesthe bond yield, USD price of stock X per share, and exchange rate (USD/GBP)as three risk factors. It is estimated that the changes in these three factorsfollow a multivariate normal distribution; the mean for all factors are 0, andstandard deviation for these three factors are 0.004, $0.68 and $0.00876 per £,respectively. Also, these three factors has the following correlation matrix10.5-0.30.510.22-0.3 0.221(a) What is the market value and duration of the coupon bond investment inthis portfolio?(b) What is the 99% DEAR of this portfolio? (Hint: the partial derivativecorresponding to the bond can be calculated using the results in (a).)

DEAR, which stands for Dollar Economic Capital at Risk, is a measure of the potential loss in a…

(a) What is the market value and duration of the coupon bond investment in this portfolio? (b) What is the 99% DEAR of this portfolio? (Hint: the partial derivative corresponding to the bond can be calculated using the results in (a).)

(a) What is the market value and duration of the coupon bond investment in this portfolio? (b) What is the 99% DEAR of this portfolio? (Hint: the partial derivative corresponding to the bond can be calculated using the results in (a).)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

(RiskMetrics) The trading book portfolio of financial institution C consists of
• A coupon bond investment with 5 years to maturity, face value $1 million,
coupon rate 4%, and coupon is paid once per year;
• 0.2 million shares of stock X;
• a foreign cash deposit of £2 million.
The current market yield for the coupon bond is 2.5%. The institution chooses
the bond yield, USD price of stock X per share, and exchange rate (USD/GBP)
as three risk factors. It is estimated that the changes in these three factors
follow a multivariate normal distribution; the mean for all factors are 0, and
standard deviation for these three factors are 0.004, $0.68 and $0.00876 per £,
respectively. Also, these three factors has the following correlation matrix
1
0.5
-0.3
0.5
1
0.22
-0.3 0.22
1
(a) What is the market value and duration of the coupon bond investment in
this portfolio?
(b) What is the 99% DEAR of this portfolio? (Hint: the partial derivative
corresponding to the bond can be calculated using the results in (a).)

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