Chapter 15

Question 1

Daily earnings at risk (DEAR): def + 3 components

Answer 1

Potential loss of a PF’s value over a one-day period as a result of adverse moves in market conditions

a) dollar value of the position
b) price sensitivity of the asset to changes in the risk factor
c) adverse move in the yield

Price volatility component = b*c

Question 2

Modified duration (MD) formula

Answer 2

MD = D/(1+R)

Question 3

Potential adverse move (PAM) in yield (at 1%, 5%) formula

Answer 3

PAM(1%) = 2.33*sig

PAM(5%) = 1.65*sig

Question 4

Price volatility (PV) of bond formula

Answer 4

PV = MD*PAM

Question 5

DEAR formula

Answer 5

= $ market value of position * PV

Question 6

N-Day VAR formula

Answer 6

= DEAR * N^0.5

where N is the # of days over which potential loss is estimated