Exam 15: Market Risk

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 use of expected shortfall (ES)is most appropriate when

The Bank for International Settlements (BISs)is an organization formed by the largest commercial banks operating in developed markets.

Banks in the countries that are members of the BIS must use the standardized framework to measure market risk exposures.

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?

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

Which of the following is a problem encountered while using more observations in the back simulation approach?

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

The Volcker Rule allows U.S.depository institutions to invest in hedge funds and private equity funds in order to gain more diversification of the trading portfolio.

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

An advantage of the historic or back simulation model for quantifying market risk includes

Market risk measurement considers the return-risk ratio of traders,which may allow a more rational compensation system to be put in place.Thus market risk measurement (MRM)aids in

A major weakness of the RiskMetrics Model is the need to assume a symmetric or normal distribution of asset returns.

Monte-Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security's value.

A disadvantage of the historic or back simulation model for quantifying market risk includes

Regulators usually view tradable assets as those held for horizons of

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

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

How can market risk be defined in absolute terms?

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/$. Over the past 500 days,the 25^th 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?