Exam 15: Market Risk

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 90 percent confidence (one-tailed) limit is used?

The N-day Market value at risk (VAR) is defined as the daily earnings at risk (DEAR) times the number of days (N).

The DEAR of a portfolio of assets is simply the weighted average of each individual assets' DEAR.

The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history.

The use of expected shortfall (ES) is most appropriate when

The Sensitivities-Based Method (SBM) suggests that banks use analysis of "sensitivities" to estimate risk charges against beta risks.

Cornbelt Bank's trading portfolio has the following equity positions: long 1,250 shares of Rio Tinto, a London mining and basic materials company, at a price of $40.00; long 2,500 shares of Intel at a price of $32.50; long 3,500 shares of Exxon/Mobile at a price of $65.00; short 1,000 shares of Credit Suisse at a price of $35.75; and short of 500 shares of Intel.What is the amount of capital that Cornbelt is required to keep against this portfolio according to the Basel Standardized approach?

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 daily earnings at risk (DEAR) of this bond portfolio?

The major traders of mortgage-backed securities prior to the recent financial crisis were investment banks and securities firms.

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): SECURITY PROBABILITY PAYOFF Alpha 0.50 355 0.49 150 0.01 -300 SECURITY PROBABILITY PAYOFF Beta 0.50 400 0.49 150 0.0025 -300 0.0075 -3,300 SECURITY PROBABILITY PAYOFF Gamma 0.49 400 0.49 150 0.01 -150 0.01 -2.000 What is the expected payoff, the 99% value at risk (VAR) and the expected shortfall (ES) of security Gamma (in millions)?

Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions?

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

Depository institutions are prohibited from proprietary trading by the Volcker Rule.

A reason for the use of market risk management (MRM) for the purpose of identifying potential misallocations of resources caused by prudential regulation is which of the following?

Which approach to measuring market risk, in effect, amounts to simulating or creating artificial trading days and FX rate changes?

The earnings at risk for an FI is a function of

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 95 percent confidence (one-tailed) limit is used?

One advantage of RiskMetrics over back simulation approach to measure market risk is that RiskMetrics provides a worst case scenario number.

Banks in the countries that are members of the BIS must use the standardized framework to measure market risk exposures.

In the early 2000s the market risk capital requirement was a large proportion of the total risk capital requirements for the largest US banks.