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FRM Tutorial 1

The document provides examples and calculations for financial risk management, specifically focusing on Value at Risk (VaR) using normal distribution for various scenarios. It includes multiple examples illustrating how to calculate VaR for portfolios with different means and standard deviations over a six-month and one-year time horizon. Additionally, it discusses the expected shortfall (ES) and the subadditivity criterion in the context of independent projects and loan portfolios.

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58 views11 pages

FRM Tutorial 1

The document provides examples and calculations for financial risk management, specifically focusing on Value at Risk (VaR) using normal distribution for various scenarios. It includes multiple examples illustrating how to calculate VaR for portfolios with different means and standard deviations over a six-month and one-year time horizon. Additionally, it discusses the expected shortfall (ES) and the subadditivity criterion in the context of independent projects and loan portfolios.

Uploaded by

jacobdonovann
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

FINANCIAL RISK MANAGEMENT

TUTORIAL 1

Sebastian Gryglewicz

1
EXAMPLE 11.1A

▪ The gain from a portfolio during six months is normally


distributed with a mean of $0 and a standard deviation
of $10 million. Find thr 95% VaR.
▪ The 5% point of the distribution of gains is … × … or
− $ … million
▪ The VaR for the portfolio with a six month time horizon
and a 95% confidence level is $ … million.

2
95% VAR WITH NORMAL DISTRIBUTION

3
USING N(X) TABLE:
CDF OF NORMAL DISTRIBUTION

4
EXAMPLE 11.1B IN LOSSES

▪ The loss from a portfolio during six month is normally


distributed with mean $0 and standard deviation
$10 million. Find 95% VaR.
▪ The 95% point of the distribution of losses is … × … or
$ … million
▪ The VaR for the portfolio with a six month time horizon
and a 95% confidence level is $ … million.

5
USING N(X) TABLE:
CDF OF NORMAL DISTRIBUTION

6
EXAMPLE 11.1C
▪ Suppose that the mean gain in Example 12.1A is $2
million instead of 0.
▪ The 5% point of the distribution of gains is … + ⋯ × … or
− $ … million
▪ The VaR for the portfolio with a six-month time horizon
and a 95% confidence level is $ … million.

▪ The VaR formula under normal distribution of gains:


𝑉𝑎𝑅 = −(𝜇 + 𝜎𝑁 −1 1 − 𝑋 )
▪ The VaR formula under normal distribution of losses:
𝑉𝑎𝑅 = 𝜇 + 𝜎𝑁 −1 (𝑋)

▪ Additional Problem: Calculate ES in Ex. 11.1B.


7
EXAMPLE 11.2

▪ All outcomes between a loss of $50 million and a gain of


$50 million are equally likely for a one-year project
▪ The VaR for a one-year time horizon and a 99%
confidence level is $ … million.

8
EXAMPLE 11.3 AND 11.4

▪ A one-year project has a 98% chance of leading to a


gain of $2 million, a 1.5% chance of a loss of $4 million,
and a 0.5% chance of a loss of $10 million
▪ The VaR with a 99% confidence level is $ … million
▪ What if the confidence level is 99.9%?
▪ What if it is 99.5%?

9
EXAMPLE 11.5 AND 11.7

▪ Each of two independent projects has a probability 0.98


of a loss of $1 million and 0.02 probability of a loss of
$10 million

▪ What is the 97.5% VaR for each project?


▪ What is the 97.5% ES for each project?
▪ What is the 97.5% VaR for the portfolio?
▪ What is the 97.5% ES for the portfolio?

▪ Does it satisfy the subadditivity criterion?

10
EXAMPLES 11.6 AND 11.8

▪ A bank has two $10 million one-year loans.

▪ If a default occurs, losses between 0% and 100% are


equally likely. If a loan does not default, a profit of 0.2
million is made.
▪ What is the 99% VaR and ES of each loan
▪ What is the 99% VaR and ES for the portfolio

11

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