DM/GBP exchange rate

DM/GBP exchange rate
Project description
questionRead the document Cr´edit G´eneral, SA, which can be found on the course website, and answer the following quetions.
3. Express mathematically the remaining exposure of the company at the end of the trading day by writing an equation of the profit for the particular obligation in DM’s in terms of the DM/GBP exchange rate. Plot the exposure where the x-axis is the DM/GBP exchange rate and the y-axis is the profit of the obligation in DM’s. Assume that the situation at the end of the trading day was as calculated after marking to market the remaining exposure.

4. Explain how the one-day VaR of DM 4.4 million and the ten-day VaR of DM 13.8 million, reported in the document, were calculated. Explain also what each of those numbers mean in practical terms.

5. If we assume that the daily changes in the DM/GBP exchange rate are normally dis- tributed with annualized daily volatility of 15% (assuming 250 trading days each year) calculate the 1% and the 5% VaR of the remaining exposure.
Help: Consider that the point that cuts off 5% of the left tail probability in a nor- mal distribution, that is the 5%-VaR, is 1.65 standard deviations from the mean. The
1%-VaR is 2.33 standard deviations from the mean.

6. Show in what way the company could have hedged the risk of the remaining exposure using either a call or a put option on the DM/GBP exchange rate. Explain whether this could be considered as a good strategy for the company given the objective that you identified in part 1 above.