Question 1

Market risk is the potential gain or loss caused by an adverse movement in market conditions.

Accepted Answer

A) True 
 B)False

Question 2

The Volcker Rule became effective in early 2013.

Accepted Answer

A) True 
 B)False

Question 3

To measure market risk at the 1 percent level of risk, what is the scaling factor for the value at risk (VAR) and the expected shortfall (ES) respectively?

Accepted Answer

A) 2.33 and 2.665 
B) 1.65 and 2.063 
C) 1.65 and 2.665 
D) 2.33 and 2.063 
E) none of the options is the correct scaling factor. 
A) 2.33 and 2.665 
B) 1.65 and 2.063 
C) 1.65 and 2.665 
D) 2.33 and 2.063 
E) none of the options is the correct scaling factor.

Question 4

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 is the expected shortfall (ES) of securities Alpha and Beta at the 99 percent confidence level, respectively (in millions)?

Accepted Answer

A) ?$300 and ?$3,300 
B) ?$3 and ?$24.75 
C) ?$3 and ?$25.50 
D) ?$300 and ?$300 
E) ?$ and ?$0.75. 
A) ?$300 and ?$3,300 
B) ?$3 and ?$24.75 
C) ?$3 and ?$25.50 
D) ?$300 and ?$300 
E) ?$ and ?$0.75.

Question 5

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 modified duration of these bonds?

Accepted Answer

A) 5.45 years. 
B) 6.00 years. 
C) 6.60 years. 
D) 10.0 years. 
E) 10.9 years. 
A) 5.45 years. 
B) 6.00 years. 
C) 6.60 years. 
D) 10.0 years. 
E) 10.9 years.

Question 6

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?

Accepted Answer

A) There is a very small sample size (<30 observations) used to estimate probability distributions. 
B) That the probability distribution is skewed to the left. 
C) That changes in asset prices are normally distributed but with fat tails. 
D) That the probability distribution is skewed to the right. 
E) That changes in asset prices follow a standard normal probability distribution. 
A) There is a very small sample size (<30 observations) used to estimate probability distributions. 
B) That the probability distribution is skewed to the left. 
C) That changes in asset prices are normally distributed but with fat tails. 
D) That the probability distribution is skewed to the right. 
E) That changes in asset prices follow a standard normal probability distribution.

Question 7

Which of the following is a problem encountered while using more observations in the back simulation approach?

Accepted Answer

A) Past observations become decreasingly relevant in predicting VAR in the future. 
B) Calculations become highly complex. 
C) Need to assume a symmetric (normal) distribution for all asset returns. 
D) Requirement for calculating the correlations of asset returns. 
E) Calculations become highly complex; need to assume a symmetric (normal) distribution for all asset returns. 
A) Past observations become decreasingly relevant in predicting VAR in the future. 
B) Calculations become highly complex. 
C) Need to assume a symmetric (normal) distribution for all asset returns. 
D) Requirement for calculating the correlations of asset returns. 
E) Calculations become highly complex; need to assume a symmetric (normal) distribution for all asset returns.

Question 8

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 correlation among assets is assumed to be -1.0?

Accepted Answer

A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000. 
A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000.

Question 9

The Default Risk Charge (DRC) is intended to capture jump-to-default risk and is calibrated to the credit risk treatment in the banking book to reduce potential discrepancy in capital requirements for similar risk exposures across the banking and trading books.

Accepted Answer

A) True 
 B)False

Question 10

Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?

Accepted Answer

A) Regulation. 
B) Resource allocation. 
C) Management information. 
D) Setting limits. 
E) Performance evaluation. 
A) Regulation. 
B) Resource allocation. 
C) Management information. 
D) Setting limits. 
E) Performance evaluation.

Question 11

The back simulation approach to estimating market risk exposure requires normally distributed asset returns, but does not require correlations of asset returns.

Accepted Answer

A) True 
 B)False

Question 12

If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be

Accepted Answer

A) less than 1. 
B) greater than 1. 
C) equal to 0. 
D) equal to 1. 
E) negative. 
A) less than 1. 
B) greater than 1. 
C) equal to 0. 
D) equal to 1. 
E) negative.

Question 13

One of the reasons FIs develop internal market risk measurement models is the proposal of the BIS to impose capital requirements on the trading portfolios of FIs.

Accepted Answer

A) True 
 B)False

Question 14

Regulators usually view tradable assets as those held for horizons of

Accepted Answer

A) less than one year. 
B) greater than one year. 
C) less than a quarter. 
D) less than a week. 
E) less than three years. 
A) less than one year. 
B) greater than one year. 
C) less than a quarter. 
D) less than a week. 
E) less than three years.

Question 15

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?

Accepted Answer

A) Back simulation is less complex. 
B) Back simulation creates a higher degree of confidence in the estimates. 
C) Asset returns do not need to be normally distributed. 
D) The correlation matrix does not need to be calculated. 
E) A worst-case scenario value is determined by back simulation. 
A) Back simulation is less complex. 
B) Back simulation creates a higher degree of confidence in the estimates. 
C) Asset returns do not need to be normally distributed. 
D) The correlation matrix does not need to be calculated. 
E) A worst-case scenario value is determined by back simulation.

Question 16

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 correlation among assets is assumed to be 0.0?

Accepted Answer

A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000. 
A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000.

Question 17

When using the BIS standardized model (partial risk factor approach) to determine capital requirements of the trading book, correlations for equity risk are set by the Federal Reserve.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?

Accepted Answer

A) Common stock. 
B) Preferred stock. 
C) Option contracts. 
D) Consol bonds. 
E) 30-year U.S.Treasury bonds. 
A) Common stock. 
B) Preferred stock. 
C) Option contracts. 
D) Consol bonds. 
E) 30-year U.S.Treasury bonds.

Question 19

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

Accepted Answer

A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
E) systematic risk. 
A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
E) systematic risk.

Question 20

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 is the value of delta for the respective positions of the two currencies in dollars?

Accepted Answer

A) -$200,000,000 and -$50,000,000. 
B) -$21,524 and -$261,930. 
C) -$21,524 and -$50,000,000. 
D) -$200,000,000 and -$261,640. 
E) -$21,524 and -$317,642. 
A) -$200,000,000 and -$50,000,000. 
B) -$21,524 and -$261,930. 
C) -$21,524 and -$50,000,000. 
D) -$200,000,000 and -$261,640. 
E) -$21,524 and -$317,642.

Exam 15: Market Risk

Market risk is the potential gain or loss caused by an adverse movement in market conditions.

The Volcker Rule became effective in early 2013.

To measure market risk at the 1 percent level of risk, what is the scaling factor for the value at risk (VAR) and the expected shortfall (ES) respectively?

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 modified duration of these bonds?

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?

Which of the following is a problem encountered while using more observations in the back simulation approach?

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 correlation among assets is assumed to be -1.0?

The Default Risk Charge (DRC) is intended to capture jump-to-default risk and is calibrated to the credit risk treatment in the banking book to reduce potential discrepancy in capital requirements for similar risk exposures across the banking and trading books.

Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?

The back simulation approach to estimating market risk exposure requires normally distributed asset returns, but does not require correlations of asset returns.

If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be

One of the reasons FIs develop internal market risk measurement models is the proposal of the BIS to impose capital requirements on the trading portfolios of FIs.

Regulators usually view tradable assets as those held for horizons of

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?

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 correlation among assets is assumed to be 0.0?

When using the BIS standardized model (partial risk factor approach) to determine capital requirements of the trading book, correlations for equity risk are set by the Federal Reserve.

Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

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 is the value of delta for the respective positions of the two currencies in dollars?

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