Bond Portfolio

Question 1
You have been hired by a local Polish bank to help them design a bond portfolio to fund a $10 million pension obligation that will come due in 4 years. The managers of the bank would like to use a 2-year zero coupon bond along with an 8-year zero coupon bond to fund this obligation. Suppose that the yield curve is flat so that the yields to maturity on all zero coupon bonds are 5%.
(a) Design a portfolio of the two bonds that will protect the pension from fluctuations in interest rates. Provide both the current percentage and monetary positions in this portfolio.
(b) Suppose, that right after you create this portfolio, the yield curve shifts to 6% at all maturities. Calculate what you expect the future value of the investment in the two bonds to be in year 4. Do you meet the obligation of the bank? Explain any difference.
Question 2
This problem requires the use of excel spreadsheet that you should include with your answers (clearly mark it with your last name). However, your final recommendation should be provided in a format of a written document/memorandum (paste any figures/tables that support your points into the report). In writing your report, whenever necessary, clearly refer to any specific calculations in the spreadsheet. You do not need to provide detailed definitions of risk measures as long as they follow the standard of what we used in class.
A large all-equity pension fund company with AUM of $500Billion that is closely following S&P 500 index is facing a possibility of new regulatory changes in its management of market risk. The new regulation would require capital charges to cover possible tail event losses based on the realistic assessment of market risk of the company. A CRO of the fund is given a task to assess a range of possible costs with regard to such charges.
It turns out that the CRO of the fund is an old buddy of yours from school times and regards you as a world-class expert. With no hesitation she then turns to you for help. Given your close friendship (and a hefty paycheck she offers) you eagerly decide to provide feedback.
In your recommendation, you may want to consider the following:
– access to daily price data of the S&P 500 index (attached data_exam.xlsx)
– various choices of risk measures
– specificity of the data in terms of its distribution and volatility structure
– tradeoffs between profitability and risk of the implemented charges
– possible adjustments in the portfolio strategy
– supporting your answers with graphs/tables

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