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APA
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Business & Marketing
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Operational Risk Problems: Economies of Scale and the Duration of Measure

Essay Instructions:

Operational Risk Problems
The doc was linked in the attachment, Please check it.
Just answer questions in the 2 page word doc, don't need to copy the questions
Please answer the following four questions. They should require approximately one substantive paragraph each. You can write your answers directly into this document.
1. Explain why there are economies of scale in hedging options.
2. What does duration tell you about the sensitivity of a bond portfolio to interest rates? What are the limitations of the duration measure?
3. Why do traders assume 252 rather than 365 days in a year when using volatilities?
4. The change in the value of a portfolio in one month is normally distributed with a mean of zero and a standard deviation of $2 million. Calculate the VaR and ES for a confidence level of 98% and a time horizon of three months.
Do your own work and make sure you answer all the questions.
It will submit on the Turnitin.
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Operational Risk Problems
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Operational Risk Problems
Q1
An economic hedge is defined as any similar or hedging transaction. On the other hand, economies of scale refer to cost rewards reaped by organizations when the production becomes resourceful. Firms achieve economies of scale through the increase of production levels reducing the costs (Kuzmina, 2017). There are economies of scale in circumventing options since the delta of the opinions which refers to the alteration of the value of the options, changes with respect to the worth of the asset. This means that when the price of an asset goes up the value of options reduces thirty times this amount.
Q2
Duration refers to a technique which is used to measure the period of payment connected with a bond investment. Duration plays a significant role in providing the needed information or data about the outcome of a trivial parallel shift in the yield curve on the value of a bond portfolio (Ajlouni, 2012). The reduction in the percentage of a value portfolio it equals the period of the portfolio bourgeoned by the amount by which interest rates are augmented in the trivial parallel shift (Ajlouni, 2012). The duration measure tends to have some limitations, which include; its only application to corresponding changes in the yield curve that are small. Another limitation of duration is that it ignores a linear connection between interest rates and bond value or price.
Q3
Traders tend to assume 252 compared to 365 days in a year while using volatilities since in the business world. Volatility tends to be much higher during the period when markets remain more open when they are closed (Spaulding, 2015). As a result, the traders opt to measure their time based on the trading days compared calendar days.
Q4
VaR for one month = $4.66 million
VaR for three months = $8.0618 million
To calculate the VaR and ES of three months, we first need to calculate that of o...
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