On Tuesday morning (before opening of the capital market) an investor, while going through his bank statement, has observed that an amount of 7…

CA Final · Advanced Financial Management · MTP · November 2024
On Tuesday morning (before opening of the capital market) an investor, while going through his bank statement, has observed that an amount of 7 lakhs is lying in his bank account. This amount is available for use from Tuesday till Friday. The Bank requires a minimum balance of 1000all the time. The investor desires to take a maximum possible exposure in the market where Value at Risk (VaR) should not exceed the balance lying in his bank account. The standard deviation of index of the same market is 1.5 per cent per day. The required confidence level is 99 per cent. Given Z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 2.2 .9861 .9864 .9868 .9871 .9875 .9878 .9881 .9884 .9887 .9890 2.3 .9893 .9896 .9998 .9901 .9904 .9906 .9909 .9911 .9913 .9916 2.4 .9918 .9920 .9922 .9923 .9925 .9929 .9931 .9932 .9934 .9936 You are required to determine the maximum possible exposure investor can take in the market.

Suggested Answer and Working Notes:

Particulars Amount (₹) Amount available in bank account 7,00,000 Minimum balance to be kept 1,000 Available amount which can be used for potential exposure in market for 4 days 6,99,000 Maximum Loss for 4 days at 99% level 6,99,000 Maximum Loss for 1 day at 99 % level = Maximum Loss for 4 days / No. of days = 699000/ √4 3,49,500 Z Score at 99% Level 2.33 Volatility in terms of Rupees (Maximum Loss/ Z Score at 99% level) = 349500/ 2.33 1,50,000 Maximum Possible Exposure (Volatility in Rupees/Std Deviation) = 150000/.015 1,00,00,000

Topics: Risk Management

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