Explanation:
In the principal mapping method, the entire portfolio's cash flows are mapped to a single risk factor representing the average maturity (or average duration) of the portfolio.
Calculate the average maturity of the portfolio:
Average Maturity = (1 year * 100m) / $200m = 2 years
Identify the VaR percentage for the average maturity: From the table, the VaR percentage for a 2-year maturity is 0.9961%.
Calculate the VaR of the portfolio:
Portfolio VaR = Total Portfolio Value * VaR Percentage
Portfolio VaR = ``1.9922 million
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Q.69 The following table gives VaR percentages at the 95% confidence level for a bond with maturities ranging from one year to 5 years:
| Maturity | VaR |
|---|---|
| 1 | 0.4777 |
| 2 | 0.9961 |
| 3 | 1.4264 |
| 4 | 1.9618 |
| 5 | 2.4120 |
A bond portfolio consists of a $100 million bond maturing in one year and a $100 million bond maturing in three years. Determine the VaR of this bond portfolio using the principal VaR mapping method
A
$1.2235m
B
$1.7765m
C
$1.9922m
D
$1.5m
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