Answer: USD 13.715

The correct answer is C, which is USD 13,715. The explanation for this is rooted in the delta-mapping technique used to determine the Value-at-Risk (VaR) for the portfolio. The portfolio consists of deep in-the-money call options, deep out-of-the-money call options, and forward contracts, all on the non-dividend paying stock TUV. To calculate the 1-day 99% VaR, we first determine the net delta (Dp) of the portfolio: - Deep in-the-money calls have a delta close to 1, contributing 5,000 * 1 = 5,000 to the net delta. - Deep out-of-the-money calls have a delta close to 0, contributing 0 * 20,000 = 0 to the net delta. - Forward contracts have a delta of 1, contributing 10,000 * 1 = 10,000 to the net delta. The net delta (Dp) is therefore 5,000 + 0 + 10,000 = 15,000. Next, we use the formula for calculating VaR: \[ \text{VaR} = \alpha \times S \times Dp \times \gamma \times \sqrt{\frac{1}{T}} \] Where: - \( \alpha \) is the z-score corresponding to the 99% confidence level, which is 2.326. - \( S \) is the price per share of stock TUV, which is USD 52. - \( Dp \) is the delta of the position, which is 15,000. - \( \gamma \) is the volatility of TUV, which is 12% or 0.12. - \( T \) is the time period in days, which is 1 day for a 1-day VaR. Plugging in the values, we get: \[ \text{VaR} = 2.326 \times 52 \times 15,000 \times 0.12 \times \sqrt{\frac{1}{252}} \] \[ \text{VaR} = 2.326 \times 52 \times 15,000 \times 0.12 \times \sqrt{0.00396825} \] \[ \text{VaR} = 2.326 \times 52 \times 15,000 \times 0.12 \times 0.06325 \] \[ \text{VaR} = USD 13,714.67 \] This calculation provides the estimated maximum loss with 99% confidence over a one-day period, which is closest to option C, USD 13,715.

Author: LeetQuiz Editorial Team