# two derivatives question

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Chapter 20

The volatility of SBN company is 1.5% per day and the size of the position is \$6 million. Assuming that the change is normally distributed, find a one-day 97% VaR and 10-day 90% VaR.

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Consider a portfolio consisting of \$4 million invested in Stock Fund and \$6 million in Bond Fund. The daily volatility of Stock Fund is 1% and the daily volatility of Bond Fund is 2%. The correlation coefficient between two funds is -0.4 and they are normally distributed.

a) Find the 10-day 99% VaR.

b) Find the diversification benefit.

Chapter 24

Explain weather derivatives and energy derivatives.

Suppose that you buy a weather call option with strike price = 200 based on HDD because you are concerned about unexpectedly cool weather in summer. The payment rate on the option contract is \$1,000 and the payment cap is \$200,000.

a) If the cumulative HDD = 320, what is your payoff?

b) If the cumulative HDD = 450, what is your payoff?

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