Assume an FI Holds Three Different Positions

question 51

Multiple Choice

Assume an FI holds three different positions.The following DEAR information is available for the positions.Position 1 is five-year zero-coupon bonds with DEAR of $12 500, position 2 is a CHF spot contract with DEAR of $9500 and the third position are Australian equities with DEAR of $34 500.The five-year zero-coupon bonds and the CHF spot position have a negative correlation of 0.5, the correlation between the zero-coupon bonds and the Australian equities is positive 0.5 and the correlation between the CHF spot contract and the Australian equities is positive 0.2.What is the DEAR of the portfolio?

• A)12,500 + 9500 + 34,500 = $56,500
• B)12,500(-0.5) + 9500(0.5) + 34,500(0.2) = $5400
• C)[12,500² + 9500²+ 34,500² - 2(-0.5)(12,500)(9500) - 2(0.5)(12,500)(34,500) - 2(0.2)(9500)(34,500)]^1/2 = $31 514
• D)[$12,500² + $9500² + $34 500² + 2(-0.5)(12,500)(9500) + 2(0.5)(12,500)(34 500) + 2(0.2)(9500)(34,500)]^1/2 = $43,363

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