Question 1

Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by mid-2009.

Accepted Answer

A) True 
 B)False

Question 2

One of the reasons for the development of internal risk measurement models is the proposal of the BIS to impose capital requirements on the trading portfolios of FIs.

Accepted Answer

A) True 
 B)False

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

A major weakness of the RiskMetrics Model is the need to assume a symmetric or normal distribution of asset returns.

Accepted Answer

A) True 
 B)False

Question 5

Using market risk management (MRM) to identify the potential return per unit of risk in different areas by comparing returns to market risk so that more capital and resources can be directed to preferred trading areas is considered to be 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 6

In the early 2000s the market risk capital requirement uniformly was a large proportion of the total risk capital requirements for the largest US banks.

Accepted Answer

A) True 
 B)False

Question 7

An advantage 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) all return distributions must be symmetric and normal. 
C) the systematic risk of the trading positions is known. 
D) there is a high degree of confidence when using small sample sizes. 
E) None of the above. 
A) calculation of a standard deviation of returns is not required. 
B) all return distributions must be symmetric and normal. 
C) the systematic risk of the trading positions is known. 
D) there is a high degree of confidence when using small sample sizes. 
E) None of the above.

Question 8

The Volker Rule reduces the specialness of banks in maturity intermediation by effectively forcing Dis to hold a matched maturity book.

Accepted Answer

A) True 
 B)False

Question 9

Daily earnings at risk (DEAR) is defined as the dollar value of a position times price sensitivity.

Accepted Answer

A) True 
 B)False

Question 10

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.

Accepted Answer

A) True 
 B)False

Question 11

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 price volatility if the maximum potential adverse move in yields is estimated at 20 basis points?

Accepted Answer

A) -1.32 percent. 
B) -2.00 percent. 
C) -2.18 percent. 
D) -1.09 percent. 
E) -1.20 percent. 
A) -1.32 percent. 
B) -2.00 percent. 
C) -2.18 percent. 
D) -1.09 percent. 
E) -1.20 percent.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) liquidity. 
B) time horizon. 
C) size of assets. 
D) effects of interest rate changes. 
E) Answers A and B only. 
A) liquidity. 
B) time horizon. 
C) size of assets. 
D) effects of interest rate changes. 
E) Answers A and B only.

Question 14

Monte-Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security's value.

Accepted Answer

A) True 
 B)False

Question 15

In the RiskMetrics model, value at risk (VAR) 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) DEAR times the √N. 
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) DEAR times the √N.

Question 16

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?

Accepted Answer

A) -$100,000. 
B) -$316,228. 
C) -$1,106,797. 
D) -$1,204,161. 
E) -$1,264,911. 
A) -$100,000. 
B) -$316,228. 
C) -$1,106,797. 
D) -$1,204,161. 
E) -$1,264,911.

Question 17

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

Accepted Answer

A) True 
 B)False

Exam 15: Market Risk

Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by mid-2009.

One of the reasons for the development of internal risk measurement models is the proposal of the BIS to impose capital requirements on the trading portfolios of FIs.

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.

A major weakness of the RiskMetrics Model is the need to assume a symmetric or normal distribution of asset returns.

Using market risk management (MRM) to identify the potential return per unit of risk in different areas by comparing returns to market risk so that more capital and resources can be directed to preferred trading areas is considered to be which of the following?

In the early 2000s the market risk capital requirement uniformly was a large proportion of the total risk capital requirements for the largest US banks.

An advantage of the historic or back simulation model for quantifying market risk includes

The Volker Rule reduces the specialness of banks in maturity intermediation by effectively forcing Dis to hold a matched maturity book.

Daily earnings at risk (DEAR) is defined as the dollar value of a position times price sensitivity.

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.

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 price volatility if the maximum potential adverse move in yields is estimated at 20 basis points?

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

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

Monte-Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security's value.

In the RiskMetrics model, value at risk (VAR) is calculated as

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?

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

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