Explanation:
Under the principal mapping method, the entire portfolio principal is mapped to its average maturity. The portfolio consists of two $100 million bonds maturing in 1 year and 3 years, giving an average maturity of (1 + 3) / 2 = 2 years. The total principal is $200 million. The VaR percentage for a 2-year maturity from the table is 0.9961%.
Therefore, the portfolio VaR = $200 million × 0.9961% = $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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