Very puzzled by the calculation for strategy A in part iii. I did it the following way, and I must be missing something obvious...
Investing 2M in single bond issue --> 20 units at 100,000 each.
In 1 year, entire portfolio will be worth either 0 (probability 2%) or 20*105,000 = 2.1M (probability 98%).
E[X] = (0.02)*0 + (0.98)*2.1M = 2.058M
Absolute VaR = 2.1M
Relative VaR = 2.058M - 2.1M = -42,000
Absolute TVaR = [0*.02+2.1M*.005]/.025 = 420,000
Relative TVaR = 2.058M - 420,000 = 1,638,000
Where am I going wrong?
Likewise, for strategy B I get:
Absolute VaR = 1.89M (2 defaults)
Relative VaR = 2.058M - 1.89M = 168,000
Absolute TVaR = [1.68M*0.0006+1.785M*0.0065+1.89M*(0.025-0.0006-0.0065)]/0.025 = 1,857,660
Relative TVaR = 2,058,000 - 1,857,660 = 200,340
The directions and orders of magnitude are consistent with the Examiners' Report but I'm not sure where the numbers are coming from (or if mine are completely wrong).
Last edited by a moderator: Sep 26, 2016