Question 1

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.

Accepted Answer

A) True 
 B)False

Question 2

The VaR 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?

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 3

The Risk Metrics model generally prefers using the present value of cash flow changes as the price-sensitivity weights.

Accepted Answer

A) True 
 B)False

Question 4

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?

Accepted Answer

A) -$714,009.31 
B) -$778,270.16 
C) -$389,135.09 
D) -$428,405.58 
E) -$471,246.16 
A) -$714,009.31 
B) -$778,270.16 
C) -$389,135.09 
D) -$428,405.58 
E) -$471,246.16

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

On December 31, 2001 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf 1.89/$. 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.

Question 7

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 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

In the BIS framework, horizontal offsets within time zones are used to adjust residual positions between zones.

Accepted Answer

A) True 
 B)False

Question 11

The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods

Accepted Answer

A) is the trading portfolio. 
B) is the investment portfolio. 
C) contains only long term derivatives. 
D) is subject to regulatory risk. 
E) cannot be differentiated on the basis of time horizon and liquidity. 
A) is the trading portfolio. 
B) is the investment portfolio. 
C) contains only long term derivatives. 
D) is subject to regulatory risk. 
E) cannot be differentiated on the basis of time horizon and liquidity.

Question 12

The Expected Shortfall (ES) is a measure of market risk that estimates the expected losses beyond a given confidence level.

Accepted Answer

A) True 
 B)False

Question 13

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 these. 
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 these.

Question 14

When using the Risk Metrics model, price volatility is calculated as

Accepted Answer

A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the ÖN. 
E) None of these. 
A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the ÖN. 
E) None of these.

Question 15

On December 31, 2001 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf 1.89/$. Over the past 500 days, the 25th 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?

Accepted Answer

A) -$96,332. 
B) -$2,157,088. 
C) -$26,375,899. 
D) -$109,233. 
E) -$314,848. 
A) -$96,332. 
B) -$2,157,088. 
C) -$26,375,899. 
D) -$109,233. 
E) -$314,848.

Question 16

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?

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 10-day VAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

Accepted Answer

A) -$100,000. 
B) -$316,228. 
C) -$1,106,797. 
D) -$1,204,161. 
E) -$1,264,911. 
A) -$100,000. 
B) -$316,228. 
C) -$1,106,797. 
D) -$1,204,161. 
E) -$1,264,911.

Question 20

Using market risk management (MRM) to identify the potential return per unit of risk in different areas by comparing returns to market risk so that more capital and resources can be directed to preferred trading areas is considered to be which of the following?

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.

Exam 15: Market Risk

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.

The VaR 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?

The Risk Metrics model generally prefers using the present value of cash flow changes as the price-sensitivity weights.

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?

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

On December 31, 2001 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf 1.89/$. What is the value of delta for the respective positions of the two currencies in dollars?

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

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.

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

In the BIS framework, horizontal offsets within time zones are used to adjust residual positions between zones.

The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods

The Expected Shortfall (ES) is a measure of market risk that estimates the expected losses beyond a given confidence level.

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?

When using the Risk Metrics model, price volatility is calculated as

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?

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

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

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 10-day VAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

Using market risk management (MRM) to identify the potential return per unit of risk in different areas by comparing returns to market risk so that more capital and resources can be directed to preferred trading areas is considered to be which of the following?

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