FRM =- Assignment No.1

FINANCIAL RISK MANAGEMENT

ASIGNMENT NO.1

MARKS =15

1.       The assignment is to be done in  a group of two students or individually: Groups and assigned companies can be downloaded here 

2.       The assignment must be done in MS-Excel and sent to ims.assign@gmail.com no later NOVEMBER 20, 2012. THE EMAIL SUBJECT SHOULD BE IN THIS FORMAT: MS: VOLATILITY ASSIGNMENT, and the file name should in this format GROUP MEMBER NAMES - VOLATILITY ASSIGNMENT. IF you do not follow these instructions, you assignment will not be recognized by my email filter and may land anywhere in clutter which my email is full of.

3.       Delayed submission will cost you 0.5 marks per day

4.       All calculations and detailed steps should be shown in the Excel sheets

This assignment involves the application of concepts related to market risk models. You are required to collect daily share prices data of any of the five firms assigned to you for PART-I of the assignment. In PART-II you have to use data of all of the five firms. Minimum number of observations should be 500. Suppose that your bank has invested Rs.500,000 in the firm.

Requirements:

A: PART - I

1.       Find volatility with: (The parameters of EWMA and GARCH must be estimated by Maximum Likelihood Methods)

a.        simple standard deviation

b.      EWMA

c.       GARCH(1,1)

2.       Calculate VaR of the firm at 95% confidence over 5 days with parametric approach using the measure of volatility as calculated in Req.1

3.       Plot distribution of the returns using class-boundaries of Rs.1500 and explain whether the distribution can be called normal?

4.       Calculate VaR of the firm over 5 days with historical simulation method at 5th percentile

5.       Calculate VaR of the firm at 95% confidence over 5 days with Monte Carlo simulation method

B: PART - II

1. Find volatility of the five firms with Matrix method, using simple standard devition (Markowitz method)

2. Find VAR of the portfolio over 10-trading day horrizen using confidence level of 99%

3. Find VAR of the portfolio using historical simulation method, using 99% confidence interval

4. Compare VaR in step 2 and 3 and explain why the difference exists between the two method

GOOD LUCK