| University | Singapore Management University (SMU) |
| Subject | Finance |
- A firm holds a bond with a value of 5250 million and an estimated probability of default of 3% over the coming 12 months. The policy of the firm sets its risk limit to 95% VaR (Value at Risk) and 95% ES (expected shortfall) for any individual security. Assume the bond bears a G2 risk of loss due to changes in the market price or in the traded value.
(a) Categorise the exact class of risk to which the bond is exposed here.
(b) Compute the 95% VaR measure for this bond and explain your result.
(c) Compute the 95% ES measure for this bond and explain your result.
(d) Assume now that the confidence level is increased to 99% on both limits. Compute the new VaR and ES measures and explain your results.
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