Advanced Risk Management

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1 Instructions

1. Read the case study �Credit General, S.A.�in your course reader.

2. The case states that on the pre-speci�ed maximum sterling position, Credit General had a daily 99 percent VAR of DM 4.4 million and a 10-day 99 percent VAR of 13.8 million. Use the data in the study to verify (approximately) that these VAR numbers are accurate.

3. At the end of the day, Credit General had a realized daily loss of DM 10.50 million and a total (including unrealized) loss of DM 34.51 mil- lion. How can you reconcile the loss with the 4.4 million VAR number computed in the previous question? The realized loss was about 2.5 times larger than the VAR and the total loss was a staggering 8 times as large as the VAR. Was the VAR calculation grossly inaccurate or did something else go wrong?

4. Writeamemoonbehalf ofMr. PierreMarsonto theBoardofDirectors of Credit General. Explain why the realized losses are larger than the VAR measures. In your memo, be sure to use the analysis from points 1-3 above.

5. In the memo you must also make a recommendation on how to decrease the exposure to pound sterling.

(a) Delineate several possible ways of decreasing Credit General�s exposure to the pound.

(b) Analyze the two possibilities that seem viable to you.

(d) Be speci�c on what trades you would take, the amounts of the trades, and what would be the expected outcome of these trades.

(e) Compute the VAR of the portfolio with the decreased pound exposure.

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