student namestudent idtutor name ali taqi201000556 ghassan alsoud mohammed haji201100040 fatima...
TRANSCRIPT
Financial Risk Management
Student Name Student ID Tutor NameAli Taqi 201000556
Ghassan AlsoudMohammed Haji 201100040Fatima Mohammed 201000393Marwa Malik 201000472
DJIA Consists of 30 “Blue-Chip” US stocks Best-known market indicator in the world
We have invested $1m in ETF (-2x) the daily average of DJIA
Introduction
- Investment Strategy: - Short Selling - Inverse ETF Short Position - (-2X) the DJIA - Invest $1,000,000
Main Characteristics
- Portfolio Chart - Using excel (using sum product
of ‘quantity’)
- Fluctuating but generally increasing
- Investor will profit at “low points”
Main Characteristics (continued)
1/2/
2013
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2013
3/3/
2013
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2013
5/2/
2013
6/1/
2013
7/1/
2013
7/31
/201
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8/30
/201
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9/29
/201
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10/2
9/20
13
11/2
8/20
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12/2
8/20
130
500000
1000000
1500000
2000000
2500000
3000000
Performance Chart
Portfolio
- Basis Price: - It is the Actual Invested Amount 1) Capital x Weight (in decimal) to get
invested amount 2) Invested amount / Stock Price to
get the number of stocks 3) Round up the number of stocks 4) Number of Stocks (rounded up) x
Stock Price to get the Actual Invested Amount
Main Characteristics (continued)
Risks in US Stock market Monetary Policy by the Federal Reserve
Federal Reserve tightens the Monetary Policy and raise interest rates
Restrictive Monetary policy = weak stock performance
Expansionary Monetary Policy= strong stock Performance
The US dollar Wage stagnation
Market risk of inverse ETFs
Risky in long-term
Leverage issues Asset management responsibilitiesCounterparty risk Costlier than traditional ETFsLess tax-efficient
- Confidence Level: 5%, Holding Period: 1-Day 1) Calculate Profit/Loss (Daily Returns were
calculated for the Returns VaR) 2) Put them in order (highest losses to highest
profits) 3) Multiply total observations (251) by 5%, we’ll
get 12.55 4) [(Observation 13 - Observation 12) x 0.55] +
Observation 12 5) VaR = 319.01, (9833.179 for daily return VaR) 6) Use PERCENTILE for confirmation
Historical VaR
- Confidence Level: 5%, Holding Period: 1-Day, Z-Score (5%): 1.96
1) Find Mu (Average) of Profit/Loss (Daily Returns for daily return VaR)
2) Find Sigma (Standard Deviation) of Profit/ Loss (Daily Returns for daily return VaR)
3) Z-Score x Sigma – Mu 4) VaR = 394.7 , (11929.17 for daily return
VaR)
Linear VaR
- Historical VaR is more accurate because: - linear VaR cannot give the correct
estimation when it comes to extreme market events
- linear VaR does not take into account the skews, return distribution, and kurtosis
Comments on VaR
Inflation Interest rate Unemployment
The world economy
The relationship between Bonds & Interest rate
Investment portfolio of $100,000 is invested in US treasury securities.
30 years treasury Bond “CUSIP 912810QN1” 50% weight.
10 years treasury note “CUSIP 912828PX2” 50% weight.
Measuring Bond Risk
Duration.- It measures number of years needed to
refund the bond price by it internal cash flows
Dv01. - Measures how much the bond value will
change if the interest rate increased or decreased by 1 basis point.
Measuring Bond Risk
30 years treasury Bond “CUSIP 912810QN1”
Measuring Bond Risk
Description DataBond CUSIP 912810QN1Settlement date 15-Feb-11Maturity date 15-Feb-41coupon rate 4.75%Percent yield 4.75%Redemption value 100frequency ( 1 = annual, 2 = semiannual, 4 = quarterly) 2Basis (1 = Actual/actual, 2 = Actual/360, 3 = Actual/365, 4 = European 30/360) 1price 100Quantity 500
Bond Duration DV01 DV01912810QN1 16.28196651 79.52120397 0.15904257
Duration: 16.28 - The time required to refund the internal cash flow of the bond is 16 years and 3 months.- After 16 years and three months the fluctuations in interest rates doesn’t affect the portfolio value.Dv01: $79.52- The bond value will be changed by $79.52 if yield increased or decreased by 1 basis point.
10 years treasury note “CUSIP 912828PX2”
Measuring Bond Risk
Duration: 8.47- The time required to refund the internal cash flow of the bond is 8 years and 5 months.- After 8 years and 5 months the fluctuations in interest rates doesn’t affect the portfolio value.
Dv01: $41.45- The bond value will be changed by $41.45 if yield increased or decreased by 1 basis point.
Description DataBond CUSIP 912828PX2Settlement date 15-Feb-11Maturity date 15-Feb-21coupon rate 3.6250%Percent yield 3.6650%Redemption value 99.667623
frequency ( 1 = annual, 2 = semiannual, 4 = quarterly) 2
Basis (1 = Actual/actual, 2 = Actual/360, 3 = Actual/365, 4 = European 30/360) 1
Price 99.43646822Quantity 501
Bond Duration DV01 DV01912828PX2 8.473410655 41.45293307 0.082705747
Bond VaR
Value at Risk “VaR” Measures the worst possible of losses in
dollars that a portfolio expected to loss over period of time.
Var for the period from April 1, 2013 - March 31, 2014 with significant level of 5%.
Two type of VaR: Historical VaR Variance-Covariance
Returns are re-arranged from the worst to the best and suggest that the history it will show itself again.
Historical VaR
Assumes that portfolio returns are distributed normally.
Factors affect Variance-Covariance VaR :- Expected returns.- Standard deviation.
Variance-Covariance
Number of observation 250
250*5%= 12.512= ($891.06)13= ($889.03)($891.06)- ($889.03)= ($2.03)($2.03)*0.5=($1.01)($891.06)+ ($1.01)= ($892.08)
Significance Level 5%Confidence Level 95%
Historical VaR ($892.08)
The confident level is 95%.losses will not exceed 5%.The historical Var calculation is and var value is ($892.08)
Historical VaR
Variance-Covariance
R1 R2R 0.03463 0.02234Slandered Deviation "Sigma" 0.219511803 0.411003577DV01 79.52120397 41.45293307Rho 0.815635113 Z of 5% significance level 1.64
Component1 Component2 Component3 Component41040.296776 0.604495838 0.380613366 0.375321341
VaR 978.99
The confident level of the portfolio is 95%, the portfolio expected 978 in one day 5% of the time.
- Types of investorsA) BullishB) Bearish- Option Spread
Trading Strategy
Credit risk - CVaR
Possibility that counterparty defaults United Parcel Service Inc. - ‘AA’ rating Delta Airlines – ‘A’ rating Verizon Communication Inc - ‘BBB’ rating Pennsylvania Elec. Co – ‘BBB’ rating Low default risk Chances that losses exceed $28343.22 less
than 1%
Conclusion ….
Thank you …