hawayi_vgo
New Member
Assume the spot and one-year forward price of gold is $1200 per ounce; i.e., neither contango nor
backwardation in gold forward curve. Assume the (initial) margin requirement for a gold futures
contract is 10% of the notional. Gold has an expected per annum return of 10% with continuous compounding and volatility of 10%. Assume risk is represented by the one-year 99% normally distributed value at risk (VaR). Under continuous compounding, if we have $12,000 to invest in gold, what is (i) the expected return and downside risk of a cash spot investment and (ii) the
expected return and downside risk of the same amount leveraged into gold futures?
The answer - (i) At 99%, the normal deviate is 2.33 such that the downside risk is 10%*2.33 = -23.3%
a) Why is the downside risk ---> volatility*2.33?
b) Is 2.33 the p value?
C) Isn't it that volatility of 10% alone signifies the downside risk...
I get a bit of the idea of the answer but can't 100% understand it. Please help. Thank you!
backwardation in gold forward curve. Assume the (initial) margin requirement for a gold futures
contract is 10% of the notional. Gold has an expected per annum return of 10% with continuous compounding and volatility of 10%. Assume risk is represented by the one-year 99% normally distributed value at risk (VaR). Under continuous compounding, if we have $12,000 to invest in gold, what is (i) the expected return and downside risk of a cash spot investment and (ii) the
expected return and downside risk of the same amount leveraged into gold futures?
The answer - (i) At 99%, the normal deviate is 2.33 such that the downside risk is 10%*2.33 = -23.3%
a) Why is the downside risk ---> volatility*2.33?
b) Is 2.33 the p value?
C) Isn't it that volatility of 10% alone signifies the downside risk...
I get a bit of the idea of the answer but can't 100% understand it. Please help. Thank you!