Explanation:
To determine the credit value at risk (Credit VaR) under a margin agreement, the exposure is capped at the margin threshold plus the VaR over the margin period of risk.
Calculate the initial position value:
Value = $10,000 \text{ bags} \times `500` = \`5,000,000`
Margin period of risk (MPOR) = 2 days
Calculate the VaR over the margin period of risk:
Daily volatility = $25% / \sqrt{252} = 0.015748$2-day volatility = $0.015748 \times \sqrt{2} = 0.022271Z\times$2-day Volatility
VaR = \`5,000,000 \times 0.022271 \times 1.645 = \183`,178 \approx \`183,200`500`,000 + \`183,200 = \
This matches option D.
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Q.43 A coffee trader has purchased 10,000 bags of dry coffee for delivery in a year’s time, at a price of $500 per bag. The rate of change of the price of coffee is assumed to take on a normal distribution with a mean of zero and a standard deviation of 25%. A margin is payable within two days whenever the credit exposure exceeds $500,000. The number of trading days in a year is assumed to be 252. Assuming the margin agreement is fully enforced, determine the 95% one-year credit value at risk of this deal.
A
$5,183,200
B
$5,259,467
C
$5,000,000
D
$683,200
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