Financial Risk Manager Part 2
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An underlying exposure with an effective annual price volatility of 6% is collateralized by a 10-year U.S. Treasury note with an effective price volatility of 8%. The correlation between the exposure and the U.S. Treasury note is zero. Changes in the value of the overall position (the exposure plus collateral) are calculated for a 10-day horizon at a 95% confidence interval. Which of the following would one expect to observe from this analysis?
An underlying exposure with an effective annual price volatility of 6% is collateralized by a 10-year U.S. Treasury note with an effective price volatility of 8%. The correlation between the exposure and the U.S. Treasury note is zero. Changes in the value of the overall position (the exposure plus collateral) are calculated for a 10-day horizon at a 95% confidence interval. Which of the following would one expect to observe from this analysis?
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The presence of collateral increases the current exposure and increases the volatility of the exposure between remargining periods.
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