Ok, to begin with, do understand that the question is incorrect. This question has been taken from the Practice Problem, Q20. They have rectified in the Errata : 1.50% should be 1.50 bps.
Thought Process: Now, coming to the solution, we know that VaR = x*z*SD. In the case of a Bond, we are given the Yield Volatility. Use that to come up with a change in yield at the given confidence level. From the change in yield, find out the change in Price of the Bond.
Calculation:
Daily Yield Volatility = 1.5bp or 0.015%.
Z at 99% = 2.33.
Monthly VaR = Z*SD = 0.015%*2.33*Sqrt(21) = 0.0016 or 16 bp
Use duration to find out the change in Bond value = 16bp*9.887 = 1.5835%
VaR of the Bond Portfolio = 1.5835%*(75*1.040175) = $1,235,337 . Round it off to A.
Ok, to begin with, do understand that the question is incorrect. This question has been taken from the Practice Problem, Q20. They have rectified in the Errata : 1.50% should be 1.50 bps.
Thought Process: Now, coming to the solution, we know that VaR = x*z*SD. In the case of a Bond, we are given the Yield Volatility. Use that to come up with a change in yield at the given confidence level. From the change in yield, find out the change in Price of the Bond.
Calculation:
Daily Yield Volatility = 1.5bp or 0.015%.
Z at 99% = 2.33.
Monthly VaR = Z*SD = 0.015%*2.33*Sqrt(21) = 0.0016 or 16 bp
Use duration to find out the change in Bond value = 16bp*9.887 = 1.5835%
VaR of the Bond Portfolio = 1.5835%*(75*1.040175) = $1,235,337 . Round it off to A.
https://www.cfainstitute.org/-/media/documents/support/programs/cfa/2022-cfa-level-iii-errata.pdf
Please check the third last bullet of reading 16
thank you very much