Exam 15: Market Risk

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?

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?

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

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

The Volcker Rule became effective in early 2013.

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

The capital requirements of internally generated market risk exposure estimates can be met

If a trader in charge of an investment portfolio of an FI generates returns that are higher than other traders at the FI,she should be rewarded with higher compensation.

The Volcker Rule reduces the specialness of banks in maturity intermediation by effectively forcing DIs to hold a matched maturity book.

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

Which of the following is a method that may overcome weaknesses in the historic or back simulation model?

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 is the expected payoff,the 99% value at risk (VAR)and the expected shortfall (ES)of security Gamma (in millions)?

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 daily earnings at risk (DEAR)of this bond portfolio?

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?

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.

The DEAR 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 20-day VAR?

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?

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

The DEAR of a portfolio of assets is simply the weighted average of each individual assets' DEAR.

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 is the one-day,99% confidence level,value at risk (VAR)of securities Alpha and Beta,respectively (in millions)?