4. Risk performance reporting presented below gives a historical perspective of

Question

4. Risk performance reporting presented below gives a historical perspective of business risk-taking and performance. It includes Business contribution (or net earnings after funding basis), risk measures (VaR), return on risk (Sharpe ratio), histogram of realized profit and losses (P&L;) vs. estimated VaR and historical revenue, risk, and excession statistics. Based on these results comment on the performance of its trading business Global Bank Market Risk and Performance Report As of Jan 31,1998 3 Months Last 1 6.8 4.0 L Contibution ($MM) 15.6 10.0 Il. Risk Measures (SMM Volatility of Daily Revenues 2.7 1.8 Return on Risk Sharpe ratio mean contribution on volatity Value 0.4 0.3 0.7 V. Histogram for 12-month period ending Jan 31, 1998 Average Daily Revenue 35 #ot Days20 U Daly Revenes $MM VVaR Excession Statistics Avg. Daily Revenue RevenueAvg VaR/1.65 Period (SMM (SMMUpside Breaks Downside Breaks 08/96-1096 0.0 0.0 0.9 1.7 0.8 0.9 0.7 11% 5% 6% 13% 5% 6%

Explanation / Answer

According to the market risk and performance reports the business of the company in the last 3 months is more volatile than the average of 12 months as the VAR estimates has increased from 1.8 to 2.7.

Although the revenues has also increased which is due to more risky trades have been executed. The average revenue per month for last 12 month was 15.6/12= 1.3$ million. While for the last 3 month that increased to 6.8/3= 2.266$ million.

Contribution has also rises from 10 $ million from last 12 months to $ 4 million in last 3 months.

Volatility has also increased from 1.8 to 2.7

Sharpecratio is % of return over per unit of risk which is 0.4 now earlier it was 0.3 but still it is lower than benchmark value of 0.7 which shows the need to improve trading strategies in terms of diversification to minimize risk or to invest in higher return paying projects. Diversification has far reaching effects on increasing Sharpe ratio.

Average daily revenue is at the highest at 0.2$ million. The histogram shows normal distribution of returns with no matter tails or large outliers.

Average daily revenue, revenue and VAR has increased.

More risk more returns.

But the downside breaks has increased and upside breaks has reduced.

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