FM305 Tutorial 5 Week 6 Questions

Source: John C. Hull. (2018) “Risk Management and Financial Institutions” Fifth Edition

Chapter 12:
12.1 What is the difference between expected shortfall and VaR? What is the theoretical
advantage of expected shortfall over VaR?

12.3 A fund manager announces that the fund's one-month 95% VaR is 6% of the size of the
portfolio being managed. You have an investment of $100,000 in the fund. How do you
interpret the portfolio manager's announcement?

12.6 Suppose that the change in the value of a portfolio over a one-day time period is normal
with a mean of zero and a standard deviation of $2 million; what is (a) the one-day 97.5% VaR,
(b) the five-day 97.5% VaR, and (c) the five-day 99% VaR?

12.8 Explain carefully the differences between marginal VaR, incremental VaR, and component
VaR for a portfolio consisting of a number of assets.

12.10 Explain what is meant by bunching.

12.12 The change in the value of a portfolio in one month is normally distributed with a mean of
zero and a standard deviation of $2 million. Calculate the VaR and ES for a confidence level of
98% and a time horizon of three months.

Chapter 13:
13.1 What assumption is being made when VaR is calculated using the historical simulation
approach and 500 days of data?

13.3 Suppose we estimate the one-day 95% VaR from 1,000 observations (in millions of dollars)
as 5. By fitting a standard distribution to the observations, the probability density function of the
loss distribution at the 95% point is estimated to be 0.01. What is the standard error of the VaR
estimate?
13.4 The one-day 99% VaR for the four-index example is calculated in Section 13.1 as $253,385.
Calculate (a) the 95% one-day VaR, (b) the 95% one-day ES, (c) the 97% one-day VaR, and (d)
the 97% one-day ES.