that is, 2.33
–
and 2 percent of the area under
the normal distribution is found beyond ± 2.33 (1 percent under each tail, 2.33
and +2.33
,
respectively). Thus, for a onetailed distribution, the 99 percent confidence level will represent
adverse moves that do not occur more than 1 day in 100. In this example, it means 2.33 x 15 =
34.95 bp. Thus, the maximum adverse yield change expected for this zerocoupon bond is an
increase of 5 bp + 34.95 basis points = 39.95, or 0.3995 percent, in interest rates.
b.
What is the highest yield change expected if a 95 percent confidence limit is required?
13.
Bank Three has determined that its inventory of €20 million and £25 million is subject to
market risk. The spot exchange rates are $1.25/€1 and $1.60/£1, respectively. The σ values
of the spot exchange rates of the euro and the pound, based on the daily changes of spot
rates over the past six months, are 65 bp and 45 bp, respectively. Determine the bank’s 10

day VaR for both currencies. Use adverse rate changes in the 99
th
percentile.
16.
Bank Four’s stock portfolio has a market value of $10 million. The beta of the
portfolio approximates the market portfolio, whose standard deviation (
m
) has been
estimated at 1.5 percent. What is the fiveday VaR of this portfolio using adverse rate
changes in the 99
th
percentile?