Question 1 Bank of Paz has a trading division that comprises of three business units, namely fixed- income, foreign exchange (FX) and equity trading. As of today, the trading division has the following information to be presented to its management team: Business Unit 1 Fixed-income Trading 1000 0.60% Business Unit 2 FX Trading 500 1.40% -0.04 Business Unit 3 Equity Trading 300 Exposure USD Return volatility Correlation with BU1 Correlation with BU2 Correlation with BU3 1 1.80% 0.03 0.25 -0.04 1 0.03 0.25 1 b) Please numerically prove to its management team which unit is able to achieve the most diversification for the division and explain why. The confidence level remains at 99%. [10 marks] Assume that the management team wants to reduce the VaR for the entire trading division. It, therefore, suggests that Business Unit 1 (i.e. fixed-income trading unit) should increase its exposure to $1200, while other units remain the same. Please prove to the management team whether this target can be achieved or not. The confidence level remains at 99%. [6 marks] Question 1 Bank of Paz has a trading division that comprises of three business units, namely fixed- income, foreign exchange (FX) and equity trading. As of today, the trading division has the following information to be presented to its management team: Business Unit 1 Fixed-income Trading 1000 0.60% Business Unit 2 FX Trading 500 1.40% -0.04 Business Unit 3 Equity Trading 300 Exposure USD Return volatility Correlation with BU1 Correlation with BU2 Correlation with BU3 1 1.80% 0.03 0.25 -0.04 1 0.03 0.25 1 b) Please numerically prove to its management team which unit is able to achieve the most diversification for the division and explain why. The confidence level remains at 99%. [10 marks] Assume that the management team wants to reduce the VaR for the entire trading division. It, therefore, suggests that Business Unit 1 (i.e. fixed-income trading unit) should increase its exposure to $1200, while other units remain the same. Please prove to the management team whether this target can be achieved or not. The confidence level remains at 99%. [6 marks] Question 1 Bank of Paz has a trading division that comprises of three business units, namely fixed- income, foreign exchange (FX) and equity trading. As of today, the trading division has the following information to be presented to its management team: Business Unit 1 Fixed-income Trading 1000 0.60% Business Unit 2 FX Trading 500 1.40% -0.04 Business Unit 3 Equity Trading 300 Exposure USD Return volatility Correlation with BU1 Correlation with BU2 Correlation with BU3 1 1.80% 0.03 0.25 -0.04 1 0.03 0.25 1 b) Please numerically prove to its management team which unit is able to achieve the most diversification for the division and explain why. The confidence level remains at 99%. [10 marks] Assume that the management team wants to reduce the VaR for the entire trading division. It, therefore, suggests that Business Unit 1 (i.e. fixed-income trading unit) should increase its exposure to $1200, while other units remain the same. Please prove to the management team whether this target can be achieved or not. The confidence level remains at 99%. [6 marks] Question 1 Bank of Paz has a trading division that comprises of three business units, namely fixed- income, foreign exchange (FX) and equity trading. As of today, the trading division has the following information to be presented to its management team: Business Unit 1 Fixed-income Trading 1000 0.60% Business Unit 2 FX Trading 500 1.40% -0.04 Business Unit 3 Equity Trading 300 Exposure USD Return volatility Correlation with BU1 Correlation with BU2 Correlation with BU3 1 1.80% 0.03 0.25 -0.04 1 0.03 0.25 1 b) Please numerically prove to its management team which unit is able to achieve the most diversification for the division and explain why. The confidence level remains at 99%. [10 marks] Assume that the management team wants to reduce the VaR for the entire trading division. It, therefore, suggests that Business Unit 1 (i.e. fixed-income trading unit) should increase its exposure to $1200, while other units remain the same. Please prove to the management team whether this target can be achieved or not. The confidence level remains at 99%. [6 marks]