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?

In calculating the value at risk (VAR)of fixed-income securities in the RiskMetrics model,

Income from trading activities of FIs is less important today than the traditional activities of banks.

Daily price volatility of a bond can be estimated by multiplying the bond's modified duration by the adverse daily yield move.

The major traders of mortgage-backed securities prior to the recent financial crisis were investment banks and securities firms.

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 shortfall (ES)of securities Alpha and Beta at the 99 percent confidence level,respectively (in millions)?

The partial risk factor approach incorporates the return correlations between assets held in the trading portfolio.

MMC Bank has an equity trading portfolio that consists of long positions of 2,750 shares of McDonald's Corp.at a price of $97.50;3,500 shares of Duke Energy at a price of $65.00;and 1,000 share of the Swiss firm USB Bancorp at a price of $47.50.In addition the bank has sold short 1,500 shares of the Japanese technology firm Sony at a price of $32.00 and 750 shares of McDonald's Corp.What is the amount of capital that MMC Bank is required to keep against this portfolio according to the Basel Standardized approach?

When using the BIS standardized model (partial risk factor approach)to determine capital requirements of the trading book,correlations for equity risk are set by the Federal Reserve.

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

Banks are limited by regulation to using the historic or back simulation method to quantify market risk exposure.

As compared to the BIS standardized framework model for measuring market risk,the internal models allowed by the large banks are subject to audit by the regulators.

Conceptually,an FI's trading portfolio can be differentiated from its investment portfolio by

The Volcker Rule is intended to reduce market risk at depository institutions.

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

In the BIS framework,vertical offsets are charges that reflect the modified duration and interest rate shocks for the maturity of each trading position.

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

Price volatility is the price sensitivity of a trading position times the potential adverse move in yield.

A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the general market risk capital requirement charge in the BIS framework.

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