Risk Management in Investment: Techniques and Strategies

Running head: RISK MANAGEMENT
Risk Management
Name of the Student
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RISK MANAGEMENT
Table of contents
1. Choosing adequate VAR with a confidence level of 99%:....................................................2
2.1 Calculating VAR with normal distribution based on 252 rolling window:.........................2
2.2 Calculating normal distribution with EWMA:.....................................................................2
2.3 Calculating historical simulation based on 252 days:..........................................................3
3. Selecting the best model for selecting required VAR (10, 99%) for January 3, 2016:..........5
4. Calculating the hedging strategy:...........................................................................................6
4.1 Beta calculation:...................................................................................................................6
4.2 Number of future contract:...................................................................................................6
4.3 VAR of the portfolio:...........................................................................................................8
4.4 Valuation of Put option:.......................................................................................................8
4.5 Valuation of six step put option:..........................................................................................9
4.5 Profit diagram:...................................................................................................................12
Bibliography:............................................................................................................................13

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RISK MANAGEMENT
1. Choosing adequate VAR with a confidence level of 99%:
The choice of adequate VAR is mainly essential as it mainly helpful in making
sufficient investment decisions by calculating the overall risk from investment. The following
choice needs to be conducted for identifying the adequate VAR (i) normal distribution based
on a 252-day rolling window, (ii) the normal distribution with a variance estimated by the
EWMA, and(iii) historical simulation based on a window of 252 days.
2.1 Calculating VAR with normal distribution based on 252 rolling window:
Particulars Qantas Fairfax Media
Sample mean -0.08% -0.01%
Sample's standard deviation 0.0198 0.0196
Confidence level 5% 99%
Normal quartile 2.3263 2.3263
VAR 1(day) -4.69% -4.56%
2.2 Calculating normal distribution with EWMA:
Items Value Value
Sample's mean 0.01% -0.03%
Sample variance 0.05% 0.05%
Standard deviation 2.24% 2.30%
Confidence level 99% 99%
Normal quantile 2.3263 2.3263
VaR (1 day) -0.10% -0.15%

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RISK MANAGEMENT
2.3 Calculating historical simulation based on 252 days:
-11.50%
-10.50%
-9.50%
-8.50%
-7.50%
-6.50%
-5.50%
-4.50%
-3.50%
-2.50%
-1.50%
-0.50%
0.50%
1.50%
2.50%
3.50%
4.50%
5.50%
6.50%
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Histogram Fairfax Media
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