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5% Annual Value at Risk

A firm has a trading book composed of two assets with normally distributed returns. The first asset has an annual expected return of 10 percent and an annual volatility of 25 percent. The firm has a position of $100 million in that asset. The second asset has an annual expected return of 20 percent and an annual volatility of 20 percent as well. The firm has a position of $50 million in that asset. The correlation coefficient between the returns of these two assets is 0.2.

Compute the 5 percent annual VaR for that firm's trading book.

Consider a trade for the firm in question where it sells $10 million of the first asset and buys $10 million of the second asset. By how much does the 5 percent VaR change?

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A firm has a trading book composed of two assets with normally distributed returns. The first asset has an annual expected return of 10 percent and an annual volatility of 25 percent. The firm has a position of $100 million in that asset. The second asset has an annual expected return of 20 percent and an annual volatility of 20 percent as well. The firm has a position of $50 million in that asset. The correlation coefficient between the returns of these two assets is 0.2. Compute the 5 percent annual VaR for that firm's trading book.

Asset Value proportion
A $100 million 0.6667 =100/150 ...

Solution Summary

Calculates the 5 percent annual VaR for the firm's trading book and change in Value at Risk when the firm sells $10 million of the first asset and buys $10 million of the second asset.

$2.19