Question 1

Price volatility is the price sensitivity times the potential adverse move in yield.

Accepted Answer

A) True 
 B)False

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A) 3.30%. 
B) 20.0%. 
C) 33.0%. 
D) 39.2%. 
E) 46.6%. 
A) 3.30%. 
B) 20.0%. 
C) 33.0%. 
D) 39.2%. 
E) 46.6%.

Question 4

Daily earnings at risk (DEAR) is calculated as

Accepted Answer

A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the √N. 
E) More than one of the above is correct. 
A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the √N. 
E) More than one of the above is correct.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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?

Accepted Answer

A) Regulation. 
B) Resource allocation. 
C) Management information. 
D) Setting limits. 
E) Performance evaluation. 
A) Regulation. 
B) Resource allocation. 
C) Management information. 
D) Setting limits. 
E) Performance evaluation.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions?

Accepted Answer

A) Interest rate risk. 
B) Credit risk. 
C) Sovereign risk. 
D) Market risk. 
E) Default risk. 
A) Interest rate risk. 
B) Credit risk. 
C) Sovereign risk. 
D) Market risk. 
E) Default risk.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?

Accepted Answer

A) Back simulation is less complex. 
B) Back simulation creates a higher degree of confidence in the estimates. 
C) Asset returns do not need to be normally distributed. 
D) The correlation matrix does not need to be calculated. 
E) A worst-case scenario value is determined by back simulation. 
A) Back simulation is less complex. 
B) Back simulation creates a higher degree of confidence in the estimates. 
C) Asset returns do not need to be normally distributed. 
D) The correlation matrix does not need to be calculated. 
E) A worst-case scenario value is determined by back simulation.

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

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 is the value of delta for the respective positions of the two currencies in dollars?

Accepted Answer

A) -$200,000,000 and -$50,000,000. 
B) -$21,524 and -$261,930. 
C) -$21,524 and -$50,000,000. 
D) -$200,000,000 and -$261,640. 
E) -$21,524 and -$317,642. 
A) -$200,000,000 and -$50,000,000. 
B) -$21,524 and -$261,930. 
C) -$21,524 and -$50,000,000. 
D) -$200,000,000 and -$261,640. 
E) -$21,524 and -$317,642.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) calculation of a standard deviation of returns is not required. 
B) calculation of the correlation between asset returns is not required. 
C) estimates of past returns used in the model may not be relevant to the current market returns. 
D) it accounts for non-standard return distributions. 
E) None of the above. 
A) calculation of a standard deviation of returns is not required. 
B) calculation of the correlation between asset returns is not required. 
C) estimates of past returns used in the model may not be relevant to the current market returns. 
D) it accounts for non-standard return distributions. 
E) None of the above.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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): $$\begin{array} { | l | l | l | } 
\hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\hline \text { Alpha } & 0.50 & 355 \
\hline & 0.49 & 150 \
\hline & 0.01 & - 300 \
\hline
\end{array}$$ $$\begin{array} { | l | l | l | } 
\hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\hline \text { Beta } & 0.50 & 400 \
\hline & 0.49 & 150 \
\hline & 0.0025 & - 300 \
\hline & 0.0075 & - 3,300 \
\hline
\end{array}$$ $$\begin{array} { | l | l | l | } 
\hline \text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\hline \text { Gamma } & 0.49 & 400 \
\hline & 0.49 & 150 \
\hline & 0.01 & - 150 \
\hline & 0.01 & - 2,000 \
\hline
\end{array}$$
-What is the expected shortfall (ES) of securities Alpha and Beta at the 99 percent confidence level, respectively (in millions)?

Accepted Answer

A) -$300 and -$3,300 
B) -$3 and -$24.75 
C) -$3 and -$25.50 
D) -$300 and -$300 
E) -$ and -$0.75. 
A) -$300 and -$3,300 
B) -$3 and -$24.75 
C) -$3 and -$25.50 
D) -$300 and -$300 
E) -$ and -$0.75.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 15: Market Risk

Price volatility is the price sensitivity times the potential adverse move in yield.

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 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?

Daily earnings at risk (DEAR) is calculated as

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

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?

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

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

Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions?

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

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?

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.

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 is the value of delta for the respective positions of the two currencies in dollars?

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

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

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

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

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

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

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters