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  3. 1).consider a zero coupon bond with 10 years matur

1).Consider a zero coupon bond with 10 years maturity with face value $100. The internal...

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Finance

1).Consider a zero coupon bond with 10 years maturity with face value $100. The internal rate of return (IRR, y) is 8% and the daily volatility of the IRR is 0.0007 (7 basis points). Required: Compute the percentage VaR over 1-day and under 99% confidence level. Compute the dollar VaR over 1-day and under 99% confidence level.

2).Consider the risk of a short position on a call option. The VaR of its underlying asset is 2000. The delta of this option is 0.5. Required: Compute the linear VaR of the option Discuss how the gamma effect would affect the linear VaR of the option.

3).A local linear valuation method is appropriate to compute VaR if the portfolio contains complex options. Required: Discuss whether the above statement is correct or not. Discuss which methodology is more suitable to compute VaR

4).Discuss how the backtesting is used to test the accuracy of VaR over 1-day and under 99% confidence level.

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