Exam 15: Market Risk

Equity trading risk weights of the BIS standardized approach vary between emerging markets and developed markets.

Assets and liabilities that are expected to require extensive time to liquidate are normally placed in the investment portfolio.

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 were the respective positions of the two currencies in dollars?

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 1500 0.49 -300 0.0025 -3,300 SECURITY PROBABILITY PAYOFF Gamma 0.49 400 0.49 150 0.01 -150 0.01 -2,000 What are the expected returns for securities Alpha and Beta,respectively (in millions)?

The JPM RiskMetrics model is based on the assumption of a binomial distribution of asset returns.

As securitization of assets continues to expand,the management of market risk will become more important to FIs.

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

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

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?

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

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

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

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?

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

Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by mid-2009.

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

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?

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

The earnings at risk for an FI is a function of

Daily earnings at risk (DEAR)is defined as the dollar value of a position times price sensitivity of that position.