First Life Insurance has the following securities in its portfolio: Swiss Francs worth SF10 million...
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Finance
First Life Insurance has the following securities in its portfolio: Swiss Francs worth SF10 million in foreign exchange and $20 million in a well-diversified mutual fund of stocks. First Life uses a 99% percent one-tailed distribution to measure value-at-risk (2.33).
2a. If the current exchange rate is SF1.45/$ and the average volatility of returns of Swiss Francs, as measured by its standard deviation, is 15 basis points, what is the Daily Earnings at Risk (DEAR)?
2b. If the average market volatility of the returns of stocks, m, is 20 basis points, what is the Daily Earnings at Risk (DEAR) for its investment in the mutual fund?
2c. If the correlation coefficient between returns of Swiss Francs and the mutual funds is 0.2, what is the DEAR of First Life's total portfolio?
2d. What correlation coefficient would make DEAR of the combined portfolio not any different from the sum of the individual DEARs of the Swiss Francs and stock portfolios? Explain your answer.
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