Example 9.2 (page 186)All outcomes between a loss of s50 millionand a gain of $50 million are equally likelyfor a one-year projectThe VaR for a one-year time horizon and a99% confidence level is $49 million6RiskManagementandFinancialInstitutions3e,Chapter9,CopyrightJohnC.Hull2012
Example 9.2 (page 186) ⚫ All outcomes between a loss of $50 million and a gain of $50 million are equally likely for a one-year project ⚫ The VaR for a one-year time horizon and a 99% confidence level is $49 million Risk Management and Financial Institutions 3e, Chapter 9, Copyright © John C. Hull 2012 6
Examples 9.3 and 9.4 (page 186). A one-year project has a 98% chance ofleading to a gain of $2 million, a 1.5%chance of a loss of $4 million, and a 0.5%chance of a loss of $10 millionThe VaR with a 99% confidence levelis $4millionWhat if the confidence levelis 99.9%?What if it is 99.5%?RiskManagementandFinancialInstitutions3e,Chapter9,CopyrightJohnC.Hull 20127
Examples 9.3 and 9.4 (page 186) ⚫ A one-year project has a 98% chance of leading to a gain of $2 million, a 1.5% chance of a loss of $4 million, and a 0.5% chance of a loss of $10 million ⚫ The VaR with a 99% confidence level is $4 million ⚫ What if the confidence level is 99.9%? ⚫ What if it is 99.5%? Risk Management and Financial Institutions 3e, Chapter 9, Copyright © John C. Hull 2012 7
Cumulative Loss Distribution forExamples 9.3 and 9.4 (Figure 9.3, page 186)1Cumulative0.995Probability0.990.9850.980.9750.970.965Loss ($million)0.960.9550.9508-224610RiskManagementandFinancialInstitutions3e,Chapter9,CopyrightJohnC.Hull20128
Cumulative Loss Distribution for Examples 9.3 and 9.4 (Figure 9.3, page 186) Risk Management and Financial Institutions 3e, Chapter 9, Copyright © John C. Hull 2012 8