valuation methodology of click funds assignment

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8/8/2019 Valuation Methodology of Click Funds Assignment http://slidepdf.com/reader/full/valuation-methodology-of-click-funds-assignment 1/12 Valuation methodology of the Robeco EURO STOXX 50 Garant Fund Okt. 01/08 By Sotirios Kourdoupalos (group 5)

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Page 1: Valuation Methodology of Click Funds Assignment

8/8/2019 Valuation Methodology of Click Funds Assignment

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Valuation methodologyof the Robeco EUROSTOXX 50 Garant Fund

Okt. 01/08

By Sotirios Kourdoupalos (group 5)

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Outline

Data

Valuation methodology

VaR methodology

Valuation results

VaR results

Conclusions

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Data group 5

DJ EURO STOXX 50 spot price

01/01/2001 until 16/02/2007

EURIBOR rates01/01/2001 until 16/02/2007. Interpolation when necessary

Index Futures December 2001, March 2007

Options December 2001 K=3300, March 2007 K=4200

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Valuation methodology group 5

Being careful for garbage in ± garbage out 

Estimation of implied dividend yield

Problem: The implied dividend yield on 22/10/2001 is reallysmall compare to the dividend yield from Datastream.Something is wrong

Hint: The starting level of the fund index is the average of 22-25 October 2001

Solution: The dividend on 25 October is used when thefutures contract is more liquid

S  F 

r qt t 

t t 

)/ln(

!

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Valuation methodology group 5

Estimation of implied volatility

Calculated from the Black-Scholes formulas on 25/10/2001

by using the implied dividend yield

Question: Why implied and not historical volatility?

Implied is forward looking

Confrontation of our estimates with Datastream's

q

Ours 0,0179 0,3799

Datastream 0,0239 0,3779

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Valuation methodology group 5

R eplicating portfolio structure

A zero coupon bond with par value equal to theguaranteed floor.

A European call on the DJ EURO STOXX 50, with strikeprice the starting index level.

The selection of up-and-in puts and their properties will bediscussed later, as there are 4 discussion points on thisissue from three other groups.

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Histor ical VaR group 5

R ecognizing the market variables

VaR measures market risk and... Market risk arises frommovements in the level or volatility of market prices

(Jorion 2001)

Candidates: index prices, interest rates and volatility

Historical or implied volatility?

The latter is affected by temporary market conditions

Volatility is missing from our paper 

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Histor ical VaR group 5

Dealing with the short position on the product 

The short position on the options has the opposite signfrom the long position

Problem: What is the short position on the bond?

Solution: We assume the bond is sold and replaced byand equal amount with the bond value of cash.

Difference between the short and the long: This amount isno more affected by market variable changes

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Histor ical VaR group 5

U sing bins

Sorting observations in bins affected our VaR estimation.

These are the differences from sorting in bins and simple

sorting (in parentheses).

Long Short

1% VaR 5% VaR 1% VaR 5% VaR1 day 2.83

(3.23)

2.03

(2.03)

2.04

(2.06)

1.49

(1.44)

10 days 9.13

(10.21)

6.42

(6.42)

6.46

(6.52)

4.70

(4.56)

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Analytical VaR group 5

C alculating Delta-gamma VaR 

Bond VaR:

Total Options VaR:

Total VaR:

R: correlation matrix

22225.0 W W E S S V 

O +(!

 RVxV  xVaR ''!

? A )()1/(1 y y B DV   y B EW !

? AO B W W  x ! ¼½

»¬-

«!

OO

 B B

W V 

W V V 

/0

0/

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Valuation r esults group 5

It is rather strange that the replicating portfolio value is

much higher than the fund value

October 25, 2001 February 16, 2007

Zero coupon bond 37,78 46,65

Call option 19,08 11,87

Management costs 3,10 3,10

UIP(54;55) 11,63 3,1

UIP(58;60) 10,64 1,8

UIP(62;65) 9,76 0,90

UIP(66;70) 8,99 0,39

UIP(70;75) 8,30 0,15

UIP(50;55) -9,99 -1,61

UIP(54;60) -9, 0 -0,84

UIP(58;65) -8,49 -0,37

UIP(62;70) -7,86 -0,14UIP(66;75) -7,30 -0,05

Sum 66,43 64,99

Options 5,55 15, 3

Share of options in fund 38% 3%

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Delta gamma r esults group 5

Correlation -0,8 -0,3643 0 0,3643 0,8

1- a 5% Va 6,842 7,463 7,945 8,399 8,912

1 - a 5%Va 21,451 23,547 25,167 26,687 28,4

1- a 1% Va 9,691 1 ,57 11,253 11,896 12,623

1 - a 1% Va 3 ,383 33,353 35,646 37,8 4 ,226