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Question 21.5: How can historical simulation be used to calculate a one-day...

How can historical simulation be used to calculate a one-day 99% VaR for the credit risk of bonds in the trading book? What are the disadvantages?

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Movements in credit spreads for all companies over the next day could be assumed to be a random sample from their movements over the past 500 days. The disadvantages of this approach are that the companies have zero chance of defaulting and accurate daily credit spread data may not be available for all companies.

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