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N1569
THE UNIVERSITY OF SUSSEX
BSc EXAMINATION
Financial Risk Management
Assessment Period: A1
INSTRUCTIONS:
1. You have 2 hours to complete the paper and students with reasonable adjustments have the
requisite extra time (typically 30 minutes).
2. Answers must be written entirely in your own handwriting and, if illustrations are used, these must
be hand-drawn diagrams.
3. You may also use any resources from the N1569 canvas site and any external web resources.
Copying verbatim from GenAI is personation which carries a heavy penalty under our University
plagiarism policy.
4. GenAI tools often give incorrect answers that are not sufficiently salient or concise, and tend to
use different notation to that adopted in this module. So while these tools might be useful aids,
if you seek their output this needs to be cross-checked with the course material anyway, adding
considerably to the time you need to complete the paper. Also, your mathematical notation should
agree with that used in lectures, otherwise marks will be deducted.
5. In addition to the 2 hours for writing your answers, all students have 30 minutes to prepare and
upload their submission. To do this, open a new Word document and type in headings for each
question, e.g. “Question 1″ and so forth. Then take low resolution photos of your handwriting
and any diagrams you have drawn, and embed them in the Word document in the correct order.
6. Next use “save as” to save the Word document as a PDF, using your candidate number as the
document title. Check the readability and size of this PDF file. Although high resolution photos
are easier to read, they are also much larger – and if your PDF is many tens of megabytes, it could
take a long time to upload to Canvas.
7. The Canvas portal closes promptly 2.5 hours after it opens (except for students with reasonable
adjustments).
8. In case of technical problems please email your PDF to business-cao@sussex.ac.uk with evidence
of the technical issue that you experienced.
/Turn over
N1569 Financial Risk Management
There are FIVE questions and each has FOUR parts. Each part carries 5 marks.
Each question should take you 24 minutes, so 6 minutes per part.
1. (a) You want to measure the market risk of a portfolio containing hundreds of cash
flows. How would you select the risk factors, and how would you map the cash flows
to these risk factors
(b) Given the 15-month interest rate is 3.5% per annum and it has a volatility of 60
basis points (bps), find the present value (PV) and the present value of a basis point
(PV01) of a cash flow of $3m 15 months from now. Justify your answers.
(c) Use the appropriate Excel workbook to map this cash flow to vertices at 1 and 2
years, in such a way that both PV and volatility are preserved under the mapping.
You are given that the 1-year rate is 4% and has volatility 65 bps, the 2-year rate is
3% and has volatility 50 bps, and the correlation between the 1-year and 2-year rates
is 0.9. Justify your answer.
(d) Use the appropriate Excel workbook to calculate the present value of a basis point
(PV01) of the mapped cash flows in part (c) and comment on your results.
2. (a) Which model would you use to measure Value-at-Risk (VaR) for an equity portfolio
and why
(b) What issues would you expect to arise from this choice, if any
(c) Calculate the 1% daily historical VaR of the S&P500 index using daily returns
between 1 January 2010 and 31 December 2023. How does this compare with the
normal VaR Give your answers as a % of the portfolio value.
(d) Scale this 1% daily VaR to a 10-day VaR under the assumption that the daily
returns on the S&P 500 are independent and identically distributed. Would the
scaled VaR remain unchanged if you were to assume the daily returns were positively
autocorrelated Justify your answer.
3. (a) What is Value at Risk (VaR) Describe its parameters.
(b) Describe the purpose of the Excel spreadsheet “Rolling Normal VaR”
(c) Change the spreadsheet so that the 30-day standard deviation is replaced by a
10-day standard deviation, leaving the VaR parameters unchanged. Describe the
effect on the graph and explain why we observe this effect.
(d) Describe the purpose of the “VaR Model Comparison” spreadsheet and discuss the
results therein.
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N1569 Financial Risk Management
END OF PAPER
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