Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

Accepted Answer

A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
E) systematic risk. 
A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
E) systematic risk.

Question 3

Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?

Accepted Answer

A) Common stock. 
B) Preferred stock. 
C) Option contracts. 
D) Consol bonds. 
E) 30-year U.S.Treasury bonds. 
A) Common stock. 
B) Preferred stock. 
C) Option contracts. 
D) Consol bonds. 
E) 30-year U.S.Treasury bonds.

Question 4

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?

Accepted Answer

A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000. 
A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000.

Question 5

The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was

Accepted Answer

A) interest rate risk. 
B) market risk. 
C) sovereign risk. 
D) firm-specific risk. 
E) systematic risk. 
A) interest rate risk. 
B) market risk. 
C) sovereign risk. 
D) firm-specific risk. 
E) systematic risk.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

When using the RiskMetrics model, price volatility 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) None of the above. 
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) None of the above.

Question 8

Which approach to measuring market risk, in effect, amounts to simulating or creating artificial trading days and FX rate changes?

Accepted Answer

A) Back simulation approach. 
B) Variance/covariance approach. 
C) Monte Carlo simulation approach. 
D) RiskMetrics Model. 
E) All of the above. 
A) Back simulation approach. 
B) Variance/covariance approach. 
C) Monte Carlo simulation approach. 
D) RiskMetrics Model. 
E) All of the above.

Question 9

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?

Accepted Answer

A) There is a very small sample size (<30 observations) used to estimate probability distributions. 
B) That the probability distribution is skewed to the left. 
C) That changes in asset prices are normally distributed but with fat tails. 
D) That the probability distribution is skewed to the right. 
E) That changes in asset prices follow a standard normal probability distribution. 
A) There is a very small sample size (<30 observations) used to estimate probability distributions. 
B) That the probability distribution is skewed to the left. 
C) That changes in asset prices are normally distributed but with fat tails. 
D) That the probability distribution is skewed to the right. 
E) That changes in asset prices follow a standard normal probability distribution.

Question 10

The earnings at risk for an FI is a function of

Accepted Answer

A) the time necessary to liquidate assets. 
B) the potential adverse move in yield. 
C) the dollar market value of the position. 
D) the price sensitivity of the position. 
E) All of the above. 
A) the time necessary to liquidate assets. 
B) the potential adverse move in yield. 
C) the dollar market value of the position. 
D) the price sensitivity of the position. 
E) All of the above.

Question 11

Regulators usually view tradable assets as those held for horizons of

Accepted Answer

A) less than one year. 
B) greater than one year. 
C) less than a quarter. 
D) less than a week. 
E) less than three years. 
A) less than one year. 
B) greater than one year. 
C) less than a quarter. 
D) less than a week. 
E) less than three years.

Question 12

In the BIS standardized framework model, the specific risk charge attempts to measure the decline in the liquidity or credit risk quality of the trading portfolio over the holding period.

Accepted Answer

A) True 
 B)False

Question 13

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 98 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 14

One advantage of RiskMetrics over back simulation is that RiskMetrics provides a worst case scenario value.

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

A) 5.45 years. 
B) 6.00 years. 
C) 6.60 years. 
D) 10.0 years. 
E) 10.9 years. 
A) 5.45 years. 
B) 6.00 years. 
C) 6.60 years. 
D) 10.0 years. 
E) 10.9 years.

Question 16

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

Accepted Answer

A) the VAR is related in a linear manner to the DEAR. 
B) the price volatility is the product of the modified duration and the adverse yield change. 
C) the yield changes are assumed to be normally distributed. 
D) All of the above. 
E) Answers B and C only. 
A) the VAR is related in a linear manner to the DEAR. 
B) the price volatility is the product of the modified duration and the adverse yield change. 
C) the yield changes are assumed to be normally distributed. 
D) All of the above. 
E) Answers B and C only.

Question 17

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?

Accepted Answer

A) -$246,111. 
B) -$218,180. 
C) -$135,474. 
D) -$149,021. 
E) -$225,789. 
A) -$246,111. 
B) -$218,180. 
C) -$135,474. 
D) -$149,021. 
E) -$225,789.

Question 18

Considering the Capital Asset Pricing Model, which of the following observations is incorrect?

Accepted Answer

A) In a well-diversified portfolio, unsystematic risk can be largely diversified away. 
B) Systematic risk is considered to be a diversifiable risk. 
C) Total risk is the sum of systematic risk and unsystematic risk. 
D) Systematic risk reflects the co-movement of a stock with the market portfolio. 
E) Unsystematic risk is specific to the firm. 
A) In a well-diversified portfolio, unsystematic risk can be largely diversified away. 
B) Systematic risk is considered to be a diversifiable risk. 
C) Total risk is the sum of systematic risk and unsystematic risk. 
D) Systematic risk reflects the co-movement of a stock with the market portfolio. 
E) Unsystematic risk is specific to the firm.

Question 19

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?

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 20

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

Accepted Answer

A) +$248; -$2,000; -$2000 
B) -$248; -$20; -$2,000 
C) -$2.150; -$2,150; -$2,150 
D) +$248; -$21.50; -$20.00 
E) ±$0.00; -248; -$2,150 
A) +$248; -$2,000; -$2000 
B) -$248; -$20; -$2,000 
C) -$2.150; -$2,150; -$2,150 
D) +$248; -$21.50; -$20.00 
E) ±$0.00; -248; -$2,150

Exam 15: Market Risk

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

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?

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 root cause of much of the losses of FIs during the financial crisis of 2008-2009 was

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

When using the RiskMetrics model, price volatility is calculated as

Which approach to measuring market risk, in effect, amounts to simulating or creating artificial trading days and FX rate changes?

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?

The earnings at risk for an FI is a function of

Regulators usually view tradable assets as those held for horizons of

In the BIS standardized framework model, the specific risk charge attempts to measure the decline in the liquidity or credit risk quality of the trading portfolio over the holding period.

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

One advantage of RiskMetrics over back simulation is that RiskMetrics provides a worst case scenario value.

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?

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

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?

Considering the Capital Asset Pricing Model, which of the following observations is incorrect?

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?

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

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