(10 points in total) A portfolio manager holds a short $150 million position in 10-year Treasury notes with a daily volatility of 0.7%.
What is the one-day VaR of this position? For the computation of VaR, assume normal distribution and a 95% confidence level. N(1.645) = 95%. (5 points)
The manager decides to hedge his position by buying 100 million 7-year Treasury notes with a daily volatility of 0.5%. The correlation between the 7-year note and the original 10-year note is 0.97. What is the 95% one-day VaR of this hedged position? (5 points)
