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Wednesday, August 27, 2008

We Get Mail

by Tanta on 8/27/2008 07:21:00 AM

It used to be, whenever I had no inspiration for a blog post at all, I could just go slumming over at one of the broker boards and find something for edification of my readers or just comic relief. These days, it seems, I just have to check my email.

Yesterday I was being asked to help write a hardship letter, which was certainly an understandable request since I have offered advice on that subject in the past and so, you might say, I asked for it. Today I am being asked to do somebody else's homework. I publish the following in its entirety with the exception of the name:


i saw in your blog that you are a risk expert.

for university purpose i am supposed to calculate a value at risk of an option.

the optoin is a call option on 1000 shares for one year with strike price at 10$. the delta of this option is 1.5, meaning that if the share price goes up by 1bp the option by 1.5bp

daily volatilty is 12cents, the value at risk for 95% is supposed to be 419. how do i get this? oh it is delta normal

thank you

Since I have examined my conscience and discovered that I have no scruples about subjecting people who ask me to do their story problems for them to a high degree of risk, I hereby invite the Calculated Risk commenting community to assist. Please explain to "A" here how to derive a VaR of 419. You may of course assume as many can openers--or as much convexity--as you need to. Remember that your answer could be going into A's frat house files, so please approach this with the appropriate degree of seriousness.