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 correlations among assets are ignored?

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 0.50 400 0.49 150 0.0025 -300 0.0075 -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)?

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

To measure market risk at the 1 percent level of risk, what is the the scaling factor for the value at risk (VAR) and the expected shortfall (ES) respectively?

The Expected Shortfall (ES) is a measure of market risk that estimates the expected losses beyond a given confidence level.

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?

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

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

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

On December 31, 2001 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?

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

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 10-day VAR?

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

How can market risk be defined in absolute terms?

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.

In the BIS framework, horizontal offsets within time zones are used to adjust residual positions between zones.

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?

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