Exam 15: Market Risk

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 10-day VAR assuming the daily returns are independently distributed?

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

Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?

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

Depository institutions are prohibited from proprietary trading by the Volker Rule.

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

The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history.

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 is the one-day, 99% confidence level, value at risk (VAR) of securities Alpha and Beta, respectively (in millions)?

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 -Based on your answers to the previous three question, which of the following is true?

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 0.80?

Although financial markets deteriorated during the summer of 2009, by September of that year the banking system had returned to normal operation.

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 0.0?

The use of expected shortfall (ES) is most appropriate when

A disadvantage of the back simulation approach to estimate market risk exposure is the limited confidence level based on the number of observations.

For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VAR) may be very large.

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

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/$. -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?

The Volker Rule became effective in early 2013.

In the BIS standardized framework model, the general market risk weights reflect the product of the modified durations and interest rate shocks.

If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be