Analysis of the 260-day Value at Risk (VAR) of a portfolio of four shares - Assignment Example

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Introduction This report aims to present the findings of an analysis of the 260-day Value at Risk (VAR) of a portfolio of four shares. The purpose of this analysis is to measure financial risk as well as to quantify and manage the risk of a portfolio. A short discussion of Value at Risk in general will be provided, followed by a review of the key questions motivating this analysis…
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Analysis of the 260-day Value at Risk (VAR) of a portfolio of four shares
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Download file to see previous pages It is the level of return comprising of a given probability (usually, 5, 2.3, or 1 percent) of experiencing a return of less than that level. Value-at-Risk was first used in the late 1980’s by major financial firms to measure the risk of their trading portfolios. Since then, Value-at-Risk is widely used quantitative tool to measure market risk. According to Hull (2005), “VaR answers the question: how much can one lose with X% probability over a pre-set horizon”. More precisely VaR is an amount (say V dollars), where the probability of losing more than V dollars is over some future time interval, T days. Value-at-Risk has become widely used by corporate treasurers, fund managers, financial institutions, brokerage firms and investment funds to gauge their financial risk. In addition, bank regulators use Value-at-Risk in determining how much capital a bank should possess to reflect the market risks it is bearing (ibid). The aim of this project was to implement various VAR methods that consist of Analytic VAR, historical (Bootstrap) VAR and Monte Carlo (MC) VAR simulation as alternative approaches to calculating VAR, by using data from four portfolios namely; Johnson Matthey PLC, Kazakhmys PLC, Rolls-Royce Holdings PLC and Xstrata PLC. These portfolios are listed in the FTSE index, which are among the largest 100 UK companies by full market value. The FTSE index1 is the most widely used of the FTSE Group's indices and is frequently reported on UK news bulletins as a measure of business prosperity, because it represents about 80% companies of the market capitalization of the whole London Stock Exchange. The companies listed in the FTSE index are determined quarterly according to their market capitalization. These companies must meet a number of requirements set out by the FTSE Group, including having a full listing on the London Stock Exchange and meeting certain tests on nationality, free float, and liquidity. In the FTSE, share prices are weighted by market capitalization, so that the larger companies make more of a difference to the index than smaller companies do. The first company is Johnson Matthey PLC. The company is world renown in refining and distribution of gold, silver, and platinum group metals in 30 countries on six continents. The company is organised in different divisions that includes Precious Metal Products division (the sole marketing arm for Anglo Platinum), Johnson Matthey's Environmental Technologies Catalysts division that produces emission control products, fuel cells, and process catalysts. The company also has Fine Chemicals and Catalysts division that make base and precious metals catalysts and chemicals. Johnson Matthey PLC has an average market capitalization of ? 43.90 billion. The second company under focus is Kazakhmys PLC. Kazakhmys PLC is a company that specializes in copper. It undertakes copper mining, processing, smelting, and refining as well as making of copper cathode and rod products. It is among the top ten copper producers in the world, with an annually production of about 350,000 tons of copper cathode that are used in computers, electric motors, automobiles, and other products. Additionally, Kazakhmys processes and sells by-products such as gold, silver, and zinc. Kazakhmys PLC has ...Download file to see next pagesRead More
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