59. Question A fund manager owns a portfolio of options on TUV, a non-dividend paying stock. The portfolio is made up of 5,000 deep in-the-money call options on TUV and 20,000 deep out-of-the-money call options on TUV. The portfolio also contains 10,000 forward contracts on TUV. Currently, TUV is trading at USD 52. Assuming 252 trading days in a year, the volatility of TUV is 12% per year, and that each of the option and forward contracts is on one share of TUV, which of the following amounts would be closest to the 1-day 99% VaR of the portfolio? | Financial Risk Manager Part 2 Quiz - LeetQuiz
Financial Risk Manager Part 2
Explanation:
Option C is correct. To estimate the VaR, we must first calculate the portfolio's aggregate delta:
Deep in-the-money calls have a delta close to 1. Total delta = 5,000 × 1 = 5,000.
Deep out-of-the-money calls have a delta close to 0. Total delta = 20,000 × 0 = 0.
Forward contracts have a delta of 1. Total delta = 10,000 × 1 = 10,000.
The total delta of the portfolio is $5,000 + 0 + 10,000 = 15,000.Thepositionequivalentintheunderlyingasset=Delta×SpotPrice=‘15`,000 × 52 = USD 780,000$.
Next, we calculate the daily volatility:
Daily volatility = Annual Volatility / Trading Days=12%/252≈0.007559.
Finally, compute the 1-day 99% VaR:
The z-score for a 99% one-tailed confidence interval is approximately 2.326.
VaR=Position Value×Daily Volatility×z-scoreVaR=USD780,000×0.007559×2.326≈USD13,715.
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Question A fund manager owns a portfolio of options on TUV, a non-dividend paying stock. The portfolio is made up of 5,000 deep in-the-money call options on TUV and 20,000 deep out-of-the-money call options on TUV. The portfolio also contains 10,000 forward contracts on TUV. Currently, TUV is trading at USD 52. Assuming 252 trading days in a year, the volatility of TUV is 12% per year, and that each of the option and forward contracts is on one share of TUV, which of the following amounts would be closest to the 1-day 99% VaR of the portfolio?
