The current market price of General Electric is $10.50 and the distribution of G
ID: 2806311 • Letter: T
Question
The current market price of General Electric is $10.50 and the distribution of General Electric’s stock price is described below:
Price ($)
5
8
9
10
11
12
15
Probability
0.01
0.03
0.2
0.52
0.20
0.03
0.01
Losses
-5.50
-2.50
-1.50
-.50
Profits
.50
1.50
4.50
Construct the distribution of losses/profits on this stock ES =
Compute the 95% VaR and the expected shortfall.
Continue with the previous exercise, but suppose that the lowest price is changed from $5 to $0. Will VaR change?
Will expected shortfall change? If it does change, calculate the new expected shortfall
Suppose that the price of an asset at close of trading yesterday was $300 and its volatility was estimated as 1.3% per day. The price at the close of trading today is $298. Update the volatility estimate using
Price ($)
5
8
9
10
11
12
15
Probability
0.01
0.03
0.2
0.52
0.20
0.03
0.01
Losses
-5.50
-2.50
-1.50
-.50
Profits
.50
1.50
4.50
Explanation / Answer
Soln :
Standard deviation will be calculated by taking the square root of last column
and Expected shortfall will be calculated by using the column = p*q and summation of the column.
Lowest price if changed from $5 to $0
refer the table :
As we can see the expected shorfall also got changed by changing the lowest value
1.3% per day estimated volatility price = $300, Net Value change due to volatility = $3.9
Volatility estimate at $298 = 3.9/298 = 1.31%
Price Prob(p) loss/profit(q) p*q q^2 p*q^2 5 0.01 -5.5 -0.055 0.003025 0.00003025 8 0.03 -2.5 -0.075 0.005625 0.00016875 9 0.20 -1.5 -0.3 0.09 0.018 10 0.52 -0.5 -0.26 0.0676 0.035152 11 0.2 0.5 0.1 0.01 0.002 12 0.03 1.5 0.045 0.002025 0.00006075 15 0.01 4.5 0.045 0.002025 0.00002025 Mean -0.5 0.055432 Standard deviation 0.23544 So, 95% VAR will be = 0.388476 95% Var value = 4.08 Expected shortfall @100% = mean -0.5Related Questions
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