Suppose First Bank has three dealers in different markets. The first dealer trades in Latin American Brady bonds and reports an annualized profit of USD 5 million. The second dealer trades in Japanese government bond (JGB) market and reports an annualized profit of USD 2million. The third dealer trades in the GBP/USD market and reports an annualized profit of USD1.5 million. Assume that the nominal face value of the Brady bonds was USD 20 million, the nominal amount of the JGB contracts was USD 50 million, and the nominal amount of the GBP/USD contracts was USD 15 million. The volatility of Latin American Brady Bonds is 32% annually, the volatility of the JGBs is 12%, and the volatility of the USD/GBP was 15%.
Which trader provided the best risk-adjusted trade-off? Use RAROC and RVAR to compare the performance of the three dealers. Assume the risk-free rate is 6.5%.
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Suppose First Bank has three dealers in different markets. The first dealer trades in Latin American Brady bonds and reports an annualized profit of USD 5 million. The second dealer trades in Japanese government bond (JGB) market and reports an annualized