LO 8.3 VaR Impact of Trade

VaR impact of trade

Inputs in green
Key outputs/formulas in yellow (asset covariance, asset beta, VaR impact of trade, expected net gain from trade)
Step 1: Setup Portfolio Inputs
Assets
Portfolio Assets (initial)
#1
#2
#3
Weights (sum to 1.0)
33%
33%
33%
Expected return
10%
20%
15%
Volatility
10%
40%
60%
Portfolio
Value
$100 
Expected Return
15.00%
Variance
 0.0376 
Volatility
19.38%
Correlation Matrix
#1
#2
#3
#1
 1.00 
 - 0 
 - 0 
#2
 1.00 
 (0.40)
#3
 1.00 
#1
#2
#3
Asset covariance w/ portfolio
 0.00 
 0.02 
 0.09 
Asset beta w/ portfolio
 0.09 
 0.57 
 2.34 
Desired Confidence
95%
#N/A
 1.64 
Step 2: Analyze trade
Trade
#1
#2
#3
Portfolio
Buy(+)/Sell(-)
1%
-1%
Expected Return
$0.10 
($0.15)
($0.05)
VaR
 0.03 
 (0.75)
($0.72)
VaR Impact of Trade = (-return) + VaR
($0.669)
Expected net gain
Expected return impact of trade
($0.050)
Firm's value increase as % of equity increase
10.0%
Net gain per dollar of equity reduced (due to VaR decrease)
0.11
Total gain due to VaR decrease
$0.074 
Net gain from trade (return impact + gain to to VaR reduction)
0.0243
vol impact
schweser
portfolio
1000000
Asset 1
beta
1.2
return
0.15
Asset 2
beta
0.8
return
0.12
marginal cost of 5% VaR
0.11
Vol of port value
18%
change in A
2%
return impact
 600.00 
CFAR - large project
proof
significance
5%
5%
critical z
-1.64485362695147
-1.64485362695147
firm
cash flow
80
100
vol
50
20
CFAR
-82.2426813475736
-32.8970725390295
large proj cost
50
50
vol
50
30
corr
0.5
0
project beta w/ respect to market portfolio
0.25
0.25
Payoff (end of single period)
58
63.45
rf rate
4.50%
5.00%
market risk premium
6.00%
3.00%
COC
6.00%
5.75%
49.35
14.805
Project NPV
4.71698113207547
10
-4.805
Vol of firm's cash flow, including the project
86.6025403784439
36.1
CFAR, including project
-142.448502644695
-59.3060409260645
cost of CFAR per dollar
0.1
0.3
-1.30360099763664
2.07730948388949