A bank has written a call option on one stock and a put opti
Question and Solution
A bank has written a call option on one stock and a put option on another stock. For the first option the stock price is
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A bank has written a call option on one stock and a put option on another stock. For the first option the stock price is 50, the strike price is 51, the volatility is 28% per annum, and the time to maturity is 9 months. For the second option the stock price is 20, the strike price is 19, the volatility is 25% per annum, and the time to maturity is 1 year. Neither stock pays a dividend, the risk-free rate is 6% per annum, and the correlation between stock price returns is 0.4. Calculate a 10-day 99% VaR: (a) Using only deltas (b) Using the partial simulation approach (c) Using the full simulation approach.
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