Exam 15: Market Risk

Price volatility is the price sensitivity times the potential adverse move in yield.

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

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

Daily value at risk (VaR) is calculated as

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

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

Sumitomo Bank's risk manager has estimated that the VaRs 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 VaR of Sumitomo's trading portfolio if the correlation among assets is assumed to be 0.0?

Regulators usually view tradable assets as those held for horizons of

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

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

In the BIS standardized framework model, the specific risk charge attempts to measure the decline in the liquidity or credit risk quality of the trading portfolio over the holding period.

A disadvantage of the back simulation approach to estimate market risk exposure is the limited confidence level based on the number of observations.

One advantage of Risk Metrics over back simulation is that Risk Metrics provides a worst case scenario value.

In calculating the value at risk (VAR) of fixed-income securities in the Risk Metrics model

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

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

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.

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

Market risk management is important as a source of information on risk exposure for senior management.

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