Exam 15: Market Risk

An advantage of the historic or back simulation model for quantifying market risk includes

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/$. Over the past 500 days, the 25^th worst day for adverse exchange rate changes saw a change in the exchange rates of 0.78 percent for the Yen and 0.30 percent for the Swiss Franc.What is the expected VAR exposure on December 31?

Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio, foreign exchange and bonds, are -$150,000 and -$250,000, respectively. What is the total DEAR of Sumitomo's trading portfolio if the correlations among assets are ignored?

The Value at Risk (VAR) provides information about the potential size of the expected loss given a level of probability.

Beta represents the systematic risk reflecting the co-movement of the returns on a specific stock with the returns of another stock.

If a trader in charge of an investment portfolio of an FI generates returns that are higher than other traders at the FI, she should be rewarded with higher compensation.

Conceptually, an FI's trading portfolio can be differentiated from its investment portfolio by

Equity trading risk weights of the BIS standardized approach vary between emerging markets and developed markets.

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 10-day VAR?

Daily earnings at risk (DEAR) is calculated as

Although financial markets deteriorated during the summer of 2009, by September of that year the banking system had returned to normal operation.

City bank has six-year zero coupon bonds with a total face value of $20 million.The current market yield on the bonds is 10 percent. What is the 10-day VAR assuming the daily returns are independently distributed?

Regulators include market risk of an institution when determining the required level of capital an FI must hold.

As compared to the BIS standardized framework model for measuring market risk, the internal models allowed by the large banks are subject to audit by the regulators.

Economic-value stress testing is intended to capture the firm's exposure to unlikely but plausible events in abnormal markets.

The mean change in the value of a portfolio of trading assets has been estimated to be 0 with a standard deviation of 20 percent.Yield changes are assumed to be normally distributed. What is the maximum yield change expected if a 98 percent confidence (one-tailed) limit is used?

How can market risk be defined in absolute terms?

In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for the maturity of each trading position.

Market risk is the uncertainty of an FI's earnings resulting from changes in market conditions such as interest rates and asset prices.

Monte-Carlo simulation is a process of creating asset returns based on actual trading days so that the probabilities of occurrence are consistent with recent historical experience.