Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio,foreign exchange and bonds,are -$150,000 and -$250,000,respectively.

What is the 10-day VAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

Question

Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio,foreign exchange and bonds,are -$150,000 and -$250,000,respectively.

What is the 10-day VAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

Quizplus · Accepted Answer

Using the formula for 10-day VAR with two assets and a correlation of -1.0:

VAR = [(DEAR1)^2 + (DEAR2)^2 - 2 x Corr x DEAR1 x DEAR2]^0.5 x [(1/10)^0.5]

VAR = [(150,000)^2 + (250,000)^2 - 2 x (-1.0) x 150,000 x 250,000]^0.5 x [(1/10)^0.5]

VAR = [$56,738,635]^0.5 x [(1/10)^0.5]

VAR = $316,227.77

Therefore, the 10-day VAR of Sumitomo's trading portfolio is -$316,228, which is closest to option B.

Sumitomo Bank's Risk Manager Has Estimated That the DEARs of Two