1.   Compute the Value-at-Risk (VaR) of a six-month forward contract. The transaction requires the investor to deliver $12.7 million in 180 days and receive €10 million in exchange. Assume that the current spot rate is $1.26/1€ and the annualized interest rate is 4% on a six-month zero coupon bond and 3% on a six-month zero coupon Euro bond.

Again, assume the variance/co-variance matrix (on daily returns) across those

instruments are as follows:

(a) Compute the value of the short position in the zero coupon dollar bond.  

 (b) Compute the value of the long position in the zero coupon euro bond (in $ terms),holding spot rate fixed.                                                                                        

(c)  Compute the VaR for this forward Contract.                                                   

(d) Compute the daily VaR for this forward contract assuming returns are normally distributed with a 90% confidential interval.