Question 1

Banks are limited by regulation to using the historic or back simulation method to quantify market risk exposure.

Accepted Answer

A) True 
 B)False

Question 2

A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the general market risk capital requirement charge in the BIS framework.

Accepted Answer

A) True 
 B)False

Question 3

Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions): $$\begin{array} { | l | l | l | } 
\hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\hline \text { Alpha } & 0.50 & 355 \
\hline & 0.49 & 150 \
\hline & 0.01 & - 300 \
\hline
\end{array}$$ $$\begin{array} { | l | l | l | } 
\hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\hline \text { Beta } & 0.50 & 400 \
\hline & 0.49 & 150 \
\hline & 0.0025 & - 300 \
\hline & 0.0075 & - 3,300 \
\hline
\end{array}$$ $$\begin{array} { | l | l | l | } 
\hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\hline \text { Gamma } & 0.49 & 400 \
\hline & 0.49 & 150 \
\hline & 0.01 & - 150 \
\hline & 0.01 & - 2.000 \
\hline
\end{array}$$ What are the expected returns for securities Alpha and Beta, respectively (in millions)?

Accepted Answer

A) ?$248 and +$248 
B) +$248 and +$248 
C) ?$300 and +$400 
D) +$300 and ?$3,300 
E) none of the options 
A) ?$248 and +$248 
B) +$248 and +$248 
C) ?$300 and +$400 
D) +$300 and ?$3,300 
E) none of the options

Question 4

Considering the market risk of traders' portfolios for the purpose of establishing logical position limits per trader in each area of trading is a resource allocation benefit of market risk measurement.

Accepted Answer

A) True 
 B)False

Question 5

A major weakness of the RiskMetrics Model is the need to assume a symmetric or normal distribution of asset returns.

Accepted Answer

A) True 
 B)False

Question 6

In estimating price sensitivity, the RiskMetrics model prefers to use modified duration over the present value of cash flow changes.

Accepted Answer

A) True 
 B)False

Question 7

A disadvantage of the historic or back simulation model for quantifying market risk includes

Accepted Answer

A) calculation of a standard deviation of returns is not required. 
B) calculation of the correlation between asset returns is not required. 
C) estimates of past returns used in the model may not be relevant to the current market returns. 
D) it accounts for non-standard return distributions. 
E) None of the options. 
A) calculation of a standard deviation of returns is not required. 
B) calculation of the correlation between asset returns is not required. 
C) estimates of past returns used in the model may not be relevant to the current market returns. 
D) it accounts for non-standard return distributions. 
E) None of the options.

Question 8

Price volatility is the price sensitivity of a trading position times the potential adverse move in yield.

Accepted Answer

A) True 
 B)False

Question 9

The partial risk factor approach incorporates the return correlations between assets held in the trading portfolio.

Accepted Answer

A) True 
 B)False

Question 10

Equity trading risk weights of the BIS standardized approach vary based on the industry of the stock being held and traded.

Accepted Answer

A) True 
 B)False

Question 11

The Volcker Rule is intended to reduce market risk at depository institutions.

Accepted Answer

A) True 
 B)False

Question 12

The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.

Accepted Answer

A) True 
 B)False

Question 13

The Monte Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security's value.

Accepted Answer

A) True 
 B)False

Question 14

The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was

Accepted Answer

A) interest rate risk. 
B) market risk. 
C) sovereign risk. 
D) firm-specific risk. 
E) systematic risk. 
A) interest rate risk. 
B) market risk. 
C) sovereign risk. 
D) firm-specific risk. 
E) systematic risk.

Question 15

Considering the Capital Asset Pricing Model, which of the following observations is incorrect?

Accepted Answer

A) In a well-diversified portfolio, unsystematic risk can be largely diversified away. 
B) Systematic risk is considered to be a diversifiable risk. 
C) Total risk is the sum of systematic risk and unsystematic risk. 
D) Systematic risk reflects the co-movement of a stock with the market portfolio. 
E) Unsystematic risk is specific to the firm. 
A) In a well-diversified portfolio, unsystematic risk can be largely diversified away. 
B) Systematic risk is considered to be a diversifiable risk. 
C) Total risk is the sum of systematic risk and unsystematic risk. 
D) Systematic risk reflects the co-movement of a stock with the market portfolio. 
E) Unsystematic risk is specific to the firm.

Question 16

The DEAR of a bank's trading portfolio has been estimated at $5,000.It is assumed that the daily earnings are independently and normally distributed. What is the 20-day VAR?

Accepted Answer

A) $5,000. 
B) $10,000. 
C) $15,811. 
D) $22,361. 
E) $50,000. 
A) $5,000. 
B) $10,000. 
C) $15,811. 
D) $22,361. 
E) $50,000.

Question 17

On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs.The closing exchange rates were ¥92/$ and Swf1.89/$. What were the respective positions of the two currencies in dollars?

Accepted Answer

A) $2,173,913 and $94,500,000. 
B) $18,400,000,000 and $26,455,026. 
C) $2,173,913 and $26,455,026. 
D) $18,400,000,000 and $94,500,000. 
E) None of the options. 
A) $2,173,913 and $94,500,000. 
B) $18,400,000,000 and $26,455,026. 
C) $2,173,913 and $26,455,026. 
D) $18,400,000,000 and $94,500,000. 
E) None of the options.

Question 18

For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VAR) may be very large.

Accepted Answer

A) True 
 B)False

Question 19

Daily earnings at risk (DEAR) is defined as the dollar value of a position times price sensitivity of that position.

Accepted Answer

A) True 
 B)False

Question 20

Income from trading activities of FIs is less important today than the traditional activities of banks.

Accepted Answer

A) True 
 B)False

Exam 15: Market Risk

Banks are limited by regulation to using the historic or back simulation method to quantify market risk exposure.

A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the general market risk capital requirement charge in the BIS framework.

Considering the market risk of traders' portfolios for the purpose of establishing logical position limits per trader in each area of trading is a resource allocation benefit of market risk measurement.

A major weakness of the RiskMetrics Model is the need to assume a symmetric or normal distribution of asset returns.

In estimating price sensitivity, the RiskMetrics model prefers to use modified duration over the present value of cash flow changes.

A disadvantage of the historic or back simulation model for quantifying market risk includes

Price volatility is the price sensitivity of a trading position times the potential adverse move in yield.

The partial risk factor approach incorporates the return correlations between assets held in the trading portfolio.

Equity trading risk weights of the BIS standardized approach vary based on the industry of the stock being held and traded.

The Volcker Rule is intended to reduce market risk at depository institutions.

The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.

The Monte Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security's value.

The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was

Considering the Capital Asset Pricing Model, which of the following observations is incorrect?

The DEAR of a bank's trading portfolio has been estimated at $5,000.It is assumed that the daily earnings are independently and normally distributed. What is the 20-day VAR?

On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs.The closing exchange rates were ¥92/$ and Swf1.89/$. What were the respective positions of the two currencies in dollars?

For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VAR) may be very large.

Daily earnings at risk (DEAR) is defined as the dollar value of a position times price sensitivity of that position.

Income from trading activities of FIs is less important today than the traditional activities of banks.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters