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Using a lookback period of 2003-2014 (i.e., using all 12 years of data), what is the one-year 99% confidence level VaR for each transaction type?

Term Paper

Like most large banks, Citigroup has traditionally derived a significant portion of it revenues and net income from its trading activities. These activities include positions taken to facilitate customer orders, as well as purely proprietary trading activities, i.e., trading for its account with its own money.

 

VaR, Capital Attribution and Profitability (65% of Term Paper)

Citigroup reports its proprietary trading activities as a business segment it calls “Principal Transactions.”

The attached spreadsheet contains a table of the profits/(losses) for the Principal Transactions segment, by transaction type, over the last 12 years (2003-2014). (This data was taken from Citigroup’s 10-K reports, filed with the SEC, with some reformatting to match the presentation format of 2014, and ignoring an immaterial amount of “Other”.)

Using this data, please address the following questions. (For all questions, assume a mean future return of zero, and ignore any autocorrelation.)

  1. Line of Business VaR vs. Total VaR
    1. Using a lookback period of 2003-2014 (i.e., using all 12 years of data), what is the one-year 99% confidence level VaR for each transaction type?
    2. What is the one-year 99% confidence level VaR for the Principal Transactions business segment as a whole?
    3. How does the VaR of the total business segment compare to the sum of the VaRs of the individual transaction types? Explain in words what causes this difference.

 

  1. Varying Lookback Periods
    1. Using a lookback period of just the most recent five years (i.e., 2010-2014), what is the one-year 99% confidence level VaR for each transaction type? What is the one-year 99% confidence level VaR for the Principal Transactions business segment as a whole?
    2. Compare the VaR of the 2010-2014 lookback period, to the VaR of the 2003-2014 lookback period, by transaction type, and as a whole. Briefly discuss the implications of your comparison.

 

  1. Assume that regulators require Citigroup to keep a multiple of 3 times VaR for capital adequacy.
    1. For the one-year 99% confidence level VaR, how much capital would be needed for the overall Principal Transactions business segment, if using a lookback period of 2003-2014?
    2. How much capital would be needed if using a lookback period of 2010-2014?
    3. Using the lookback period of 2003-2014, allocate the required capital of the overall Principal Transactions business segment to the individual transaction types, based on their relative contribution to VaR.

 

  1. Citigroup management wants to review the risk-adjusted returns of the Principal Transactions business segment. Using the required capital calculated in Question 3:
    1. What was the Return on Required Capital (“ROC”) for 2014 for the business segment as a whole? (ROC is equal to the reported revenue divided by required capital.)
    2. What was the ROC for 2014 for each transaction type?
    3. What was the ROC for the average revenues in the post-Credit Crisis years (2010-2014), for each transaction type? What recommendations might you make to management?

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