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Case Study 2

Advanced Risk Management

Due: Feb 1st, 2022, 8am

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.

(c) Explain which of the two seems more appropriate to implement.

(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.

1

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