CAIIB BFM Unit 22 - Numerical - Time Horizon & Bond Value

Volatility with time horizon & Bond Value

Ex.1
If daily volatility of a Security is 2%, how much will be monthly volatility?

Solution
Monthly volatility = Daily Volatility * ∫30 = 2*∫30 = 2*5.477 = 10.95%

Ex.2
If per annum volatility is 30% and nos. of trading days per annum be 250, how much will be daily volatility?

Solution
Annual Volatility = Daily Volatility * ∫250 = Daily Volatility * 15.81
30 = Daily Volatility *15.81
Daily volatility = 30/15.81 = 1.90%

Ex.3
If 1 day VaR of a portfolio is Rs. 50000/- with 97% confidence level. In a period of 1 year of 300 trading days, how many times the loss on the portfolio may exceed Rs. 50000/-.

Solution
97% confidence level means loss may exceed the given level (50000)on 3 days out of 100.
If out of 100 days loss exceeds the given level on days =3
Then out of 300 days, loss exceeds the given level = 3/100*300 =9 days.

Ex.4
A 5 year 5% Bond has a BPV of Rs. 50/-, how much the bond will gain or lose due to increase in the yield of bond by 2 bps

Solution
Increase in yield will affect the bond adversely and the bond will lose.
Since BPV of the bond is Rs. 50/-. Increase in yield by 2 bps will result into loss of value of Bond by 50*2=100.

Ex.5
1 day VaR of a portfolio is Rs. 50000/- with 90% confidence level. In a period of 1 year (250 days) how many times the loss on the portfolio may not exceed Rs.50000/-
Ans. 90% confidence level means on 10 days out of 100, the loss will be more than Rs. 50000/-.
Out of 250 days, loss will be more than 50000/- on 25 days Ans.

Bond Value, Current Yield

Bond-1             Bond-2
Face Value                  100                  100
Annual Coupon            8%                   10%
Term to Maturity        3 yrs                4 yrs
Market Price               80                    90

Ex. 1 Find Current Yield of Bond 2
Solution
Coupon amount X100 = 10/90*100 = 11.11%
Market Value

Ex. 2 Find YTM of Bond 1 & 2
YTM of Bond 1 = 17.07%
YTM of Bond 2 = 13.41%

Ex. 3 Find McCauley Duration of Bond 1
2.76 years

Ex. 4
Find Modified Duration of Bond 2
Solution
McCauley duration/1+yield
=3.46/(1+13.41%) = 3.46/1.1341 = 3.05 yrs.

Ex. 5 What is %age change in price of Bond 2 if YTM increases by 1%
Expected %age change in price
=Modified Duration x %age change in yield
=3.5 x 1 = -3.05% (Decrease in price of bond)

Ex. 5 What is %age change in price of Bond 2 if YTM decreases by 1%
=3.5 x 1 = 3.05% (Increase in price of bond)

Ex.6 As an investor, in which bond would you like to invest.
Bond 1 (YTM is more)

AMA – Estimated level of Operational Risk and Impact of Internal Control

Question: Probability of Occurrence : 4
Potential Financial impact =4
Impact of Internal controls = 0%
Solution:
{ Probability of occurrence x Potential financial impact x Impact of internal controls } ^0.5
=(4x4) ^0.5 = ∫16 = 4 Ans.(High Risk)