Financial Risk and Regulation 2016-FRR Dumps PDF

The portfolio VaR when the returns of two assets are uncorrelated can be calculated using the formula:

Portfolio VaR=(VaR of ThetaGroup)2+(VaR of VolgaCorp)2Portfolio VaR=(VaR of ThetaGroup)2+(VaR of VolgaCorp)2​

Plugging in the values:

Portfolio VaR=(0.3)2+(0.4)2=0.09+0.16=0.25=0.5Portfolio VaR=(0.3)2+(0.4)2​=0.09+0.16​=0.25​=0.5

So, the portfolio VaR is $0.5 million.

The delta-normal method, which uses the delta to approximate the change in the price of an option, has limitations when dealing with options. This method can significantly misrepresent the risks associated with options, particularly because it only considers the linear component of the price change (delta) and ignores the convexity (gamma). Specifically, it tends to understate the risks of long positions in calls because it does not fully account for the increasing delta as the underlying asset price rises, leading to potential underestimation of the risk. Conversely, it overstates the risks of short positions in puts, as the delta of puts decreases less dramatically when the price of the underlying asset falls.

Short selling in physical commodities markets involves borrowing the commodity and selling it with the hope of buying it back at a lower price. The right combination of characteristics that generally allows short selling without making the transaction prohibitively expensive includes factors like liquidity, storage costs, and ease of borrowing.

Oil: While the oil market is highly liquid, storage costs and logistical challenges can make short selling more expensive.

Natural Gas: Similar to oil, natural gas involves significant storage and transportation costs, making short selling less attractive.

Grain: Grain markets can have high volatility and storage costs that could complicate short selling.

Gold: Gold has the ideal combination of characteristics for short selling. It is highly liquid, has relatively low storage costs, and is easy to borrow. These factors make short selling gold less prohibitively expensive compared to other commodities.

The Sarbanes-Oxley Act includes risk and control requirements for financial statements in the United States. It mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud. This Act directly impacts operational risk management by setting standards for all U.S. public company boards, management, and public accounting firms.