Question 1

Market risk is defined as the risk related to the uncertainty of an FI's:

Accepted Answer

A)  earnings on its trading portfolio caused by changes in market conditions. 
B)  reputation caused by changes in market conditions. 
C)  solvency caused by the default by specific markets (industries). 
D)  funding capacity in money markets or in capital markets. 
A)  earnings on its trading portfolio caused by changes in market conditions. 
B)  reputation caused by changes in market conditions. 
C)  solvency caused by the default by specific markets (industries). 
D)  funding capacity in money markets or in capital markets.

Question 2

Which of the following statements is true?

Accepted Answer

A)  There are no major flaws associated with VAR models like RiskMetrics. 
B)  One problem associated with VAR models such as RiskMetrics is the assumption of a normal distribution, that is, a skew of 1. 
C)  One problem associated with VAR models such as RiskMetrics is that these models ignore the risk in the payments of accrued interest on an FI's debt securities. 
D)  None of the listed options are correct. 
A)  There are no major flaws associated with VAR models like RiskMetrics. 
B)  One problem associated with VAR models such as RiskMetrics is the assumption of a normal distribution, that is, a skew of 1. 
C)  One problem associated with VAR models such as RiskMetrics is that these models ignore the risk in the payments of accrued interest on an FI's debt securities. 
D)  None of the listed options are correct.

Question 3

Which of the following statements is true?

Accepted Answer

A)  The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes. 
B)  The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes. 
C)  The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes. 
D)  Assumptions regarding the distribution of yields are not significant in market risk measurement models. 
A)  The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes. 
B)  The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes. 
C)  The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes. 
D)  Assumptions regarding the distribution of yields are not significant in market risk measurement models.

Question 4

Monte Carlo simulations address the problems imposed by a limited number of actual observations, by generating additional observations.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is true?

Accepted Answer

A)  Since regulators are concerned with the social cost of a failure, regulatory models will normally tend to be more conservative than private sector models that are concerned only with the private costs of failure. 
B)  Since regulators are concerned with the social cost of a failure, regulatory models will normally tend to be less conservative than private sector models that are concerned only with the private costs of failure. 
C)  Regulators and private firms are both concerned with the social cost of a failure and thus their models do not differ. 
D)  None of the listed options are correct. 
A)  Since regulators are concerned with the social cost of a failure, regulatory models will normally tend to be more conservative than private sector models that are concerned only with the private costs of failure. 
B)  Since regulators are concerned with the social cost of a failure, regulatory models will normally tend to be less conservative than private sector models that are concerned only with the private costs of failure. 
C)  Regulators and private firms are both concerned with the social cost of a failure and thus their models do not differ. 
D)  None of the listed options are correct.

Question 6

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25 per cent. What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

Accepted Answer

A)  $2 683.28 
B)  $6 123.72 
C)  $200 000.00 
D)  $489 897.95 
A)  $2 683.28 
B)  $6 123.72 
C)  $200 000.00 
D)  $489 897.95

Question 7

What is meant by vertical offset?

Accepted Answer

A)  The deduction of capital charges because long and short positions in the same maturity bucket but in different instruments more than offset each other. 
B)  The assignment of additional capital charges because long and short positions in the same maturity bucket but in different instruments cannot perfectly offset each other. 
C)  The deduction of capital charges because long and short positions in different maturity buckets but in the same instrument more than offset each other. 
D)  The assignment of additional capital charges because long and short positions in different maturity buckets but in the same instrument cannot perfectly offset each other. 
A)  The deduction of capital charges because long and short positions in the same maturity bucket but in different instruments more than offset each other. 
B)  The assignment of additional capital charges because long and short positions in the same maturity bucket but in different instruments cannot perfectly offset each other. 
C)  The deduction of capital charges because long and short positions in different maturity buckets but in the same instrument more than offset each other. 
D)  The assignment of additional capital charges because long and short positions in different maturity buckets but in the same instrument cannot perfectly offset each other.

Question 8

Consider the following hypothetical foreign exchange portfolio: What are the daily earnings at risk for the portfolio?

Accepted Answer

A)  $200 / 0.45 = $444.44 
B)  $200 $\times$ 0.45 = $90.00 
C)  ($200 / 0.45) / 100 = $4.44 
D)  ($200 $\times$ 0.45) / 100 = $0.90 
A)  $200 / 0.45 = $444.44 
B)  $200 $\times$ 0.45 = $90.00 
C)  ($200 / 0.45) / 100 = $4.44 
D)  ($200 $\times$ 0.45) / 100 = $0.90

Question 9

Which of the following is an advantage of the back simulation approach?

Accepted Answer

A)  simplicity 
B)  assumption of normally distributed asset returns 
C)  calculation of correlations of asset returns 
D)  All of the listed options are correct. 
A)  simplicity 
B)  assumption of normally distributed asset returns 
C)  calculation of correlations of asset returns 
D)  All of the listed options are correct.

Question 10

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is true?

Accepted Answer

A)  In a well-diversified portfolio, unsystematic risk can be largely diversified away, leaving behind systematic. 
B)  In a well-diversified portfolio, systematic risk can be largely diversified away, leaving behind unsystematic. 
C)  In a well-diversified portfolio, both systematic and unsystematic risk can be largely diversified away. 
D)  No matter how well diversified a portfolio is, unsystematic and systematic are always existent. 
A)  In a well-diversified portfolio, unsystematic risk can be largely diversified away, leaving behind systematic. 
B)  In a well-diversified portfolio, systematic risk can be largely diversified away, leaving behind unsystematic. 
C)  In a well-diversified portfolio, both systematic and unsystematic risk can be largely diversified away. 
D)  No matter how well diversified a portfolio is, unsystematic and systematic are always existent.

Question 12

Which of the following statements is true?

Accepted Answer

A)  The BIS requires banks to define an adverse change in rates as being the 95th percentile. 
B)  The BIS requires banks to define an adverse change in rates as being the 97.5th percentile. 
C)  The BIS requires banks to define an adverse change in rates as being the 99th percentile. 
D)  The BIS requires banks to define an adverse change in rates as being the 99.5th percentile. 
A)  The BIS requires banks to define an adverse change in rates as being the 95th percentile. 
B)  The BIS requires banks to define an adverse change in rates as being the 97.5th percentile. 
C)  The BIS requires banks to define an adverse change in rates as being the 99th percentile. 
D)  The BIS requires banks to define an adverse change in rates as being the 99.5th percentile.

Question 13

RiskMetrics weights more recent observations more highly than past observations, which allows more recent news to be more heavily reflected in the calculation of the standard deviation.

Accepted Answer

A) True 
 B)False

Question 14

Explain the basic concept of the RiskMetric model. What are the major disadvantages? How can the major disadvantages be addressed?

Accepted Answer

RiskMetrics model (or the variance/covar

Question 15

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points. What is the bond's price volatility (round to two decimals)?

Accepted Answer

A)  2.45 $\times$ 0.00165 = 0.40%. 
B)  -2.45 $\times$ 0.00165 = -0.40%. 
C)  2.45 $\times$ 0.0165 = 4.04%. 
D)  -2.45 $\times$ 0.0165 = -4.04%. 
A)  2.45 $\times$ 0.00165 = 0.40%. 
B)  -2.45 $\times$ 0.00165 = -0.40%. 
C)  2.45 $\times$ 0.0165 = 4.04%. 
D)  -2.45 $\times$ 0.0165 = -4.04%.

Market risk is defined as the risk related to the uncertainty of an FI's:

Which of the following statements is true?

Which of the following statements is true?

Monte Carlo simulations address the problems imposed by a limited number of actual observations, by generating additional observations.

Which of the following statements is true?

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25 per cent. What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

What is meant by vertical offset?

Consider the following hypothetical foreign exchange portfolio: What are the daily earnings at risk for the portfolio?

Which of the following is an advantage of the back simulation approach?

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Which of the following statements is true?

Which of the following statements is true?

RiskMetrics weights more recent observations more highly than past observations, which allows more recent news to be more heavily reflected in the calculation of the standard deviation.

Explain the basic concept of the RiskMetric model. What are the major disadvantages? How can the major disadvantages be addressed?

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points. What is the bond's price volatility (round to two decimals)?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 9: Market Risk

Market risk is defined as the risk related to the uncertainty of an FI's:

Which of the following statements is true?

Which of the following statements is true?

Monte Carlo simulations address the problems imposed by a limited number of actual observations, by generating additional observations.

Which of the following statements is true?

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25 per cent. What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

What is meant by vertical offset?

Consider the following hypothetical foreign exchange portfolio: What are the daily earnings at risk for the portfolio?

Which of the following is an advantage of the back simulation approach?

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Which of the following statements is true?

Which of the following statements is true?

RiskMetrics weights more recent observations more highly than past observations, which allows more recent news to be more heavily reflected in the calculation of the standard deviation.

Explain the basic concept of the RiskMetric model. What are the major disadvantages? How can the major disadvantages be addressed?

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points. What is the bond's price volatility (round to two decimals)?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters