Financial Institution Management Essay

607 words - 2 pages

II. Historic simulation ApproachTo calculate our position in 2 000 000 Swiss Frank with confidence level 99% and 1% of VAR10 days we did the followings:Got information about exchanged rates $/CHF from http://www.federalreserve.gov/Releases/H10/Hist/ over 2 year period to have more than 500 observations and took only 501 observations (see Excel, sheet "FOREX").We converted our position from CHF to USD at a rate of 0,8836 as of March 25, 2014 and we have 2 263 467,63We depreciated the exchange rate by 1%.To calculate it, we took the exchange rate as of March 25, 2014 0,8836*(1+0.01)=0,8924.We revalued our position 2 000 000/0,8924=2 241 057,06We calculated the delta by finding the difference in $ positions delta= -22 410,57We found actual exchange rate. To calculate this, we needed to take 501 observations, and use formula [P1/P0 - 1] * 100 (See Excel sheet "FOREX").We Found gains/losses. To calculate the real gain/loss we multiplied delta by actual exchange rate changes for each observation -22 410, 57* changes in exchange rate.We ranked gains and losses from the worst to best using Excel function SORT( see excel file, sheet "FOREX, step 4" and then put the figures into a graph( see excel file, sheet "FOREX", step 5)We found 1% VAR10day taking the worst fifth loss wish is -31022,90 and multiplying by and number be obtained for VAR10day= -98103 and we interpreted the results as follow: I am 99% confident that I will not lose more than $-98103 over next 10 days, if Swiss Frank depreciates by 1%, but there is still 1% probability that my losses will be greaterAdvantages and Disadvantages of Risk Metrics ApproachAdvantages:Simplicity of the modelyield changes are normally distributed (that means a symmetric distribution for all asset returns)Disadvantages:we need to assume a symmetric (Normal) distribution for all asset returns, but in reality asset return distributions are not symmetric.As a result,this...

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