Question 1

Which of the following statements is true?

Accepted Answer

A) The All Ordinaries index is Australia's premier market indicator, which represents the 100 largest companies listed on the Australian Stock Exchange. 
B) The All Ordinaries index is Australia's premier market indicator, which represents the 300 largest companies listed on the Australian Stock Exchange. 
C) The All Ordinaries index is Australia's premier market indicator, which represents the 500 largest companies listed on the Australian Stock Exchange. 
D) The All Ordinaries index is Australia's premier market indicator, which represents all companies listed on the Australian Stock Exchange. 
A) The All Ordinaries index is Australia's premier market indicator, which represents the 100 largest companies listed on the Australian Stock Exchange. 
B) The All Ordinaries index is Australia's premier market indicator, which represents the 300 largest companies listed on the Australian Stock Exchange. 
C) The All Ordinaries index is Australia's premier market indicator, which represents the 500 largest companies listed on the Australian Stock Exchange. 
D) The All Ordinaries index is Australia's premier market indicator, which represents all companies listed on the Australian Stock Exchange. C

Question 2

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25%.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

Accepted Answer

A) $2,683.28 
B) $6123.72 
C) $200,000.00 
D) $489,897.95 
A) $2,683.28 
B) $6123.72 
C) $200,000.00 
D) $489,897.95 B

Question 3

A major advantage is that RiskMetrics directly provides a worst-case scenario number, while this is not the case for back simulation.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following statements is true?

Accepted Answer

A) The BIS requires banks to define an adverse change in rates as being the 95th percentile. 
B) The BIS requires banks to define an adverse change in rates as being the 97.5th percentile. 
C) The BIS requires banks to define an adverse change in rates as being the 99th percentile. 
D) The BIS requires banks to define an adverse change in rates as being the 99.5th percentile. 
A) The BIS requires banks to define an adverse change in rates as being the 95th percentile. 
B) The BIS requires banks to define an adverse change in rates as being the 97.5th percentile. 
C) The BIS requires banks to define an adverse change in rates as being the 99th percentile. 
D) The BIS requires banks to define an adverse change in rates as being the 99.5th percentile.

Question 5

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Accepted Answer

A) True 
 B)False

Question 6

Describe the process of the partial risk factor approach.

Accepted Answer

The partial risk factor approach applies

Question 7

Which of the following statements is true?

Accepted Answer

A) The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes. 
B) The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes. 
C) The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes. 
D) Assumptions regarding the distribution of yields are not significant in market risk measurement models. 
A) The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes. 
B) The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes. 
C) The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes. 
D) Assumptions regarding the distribution of yields are not significant in market risk measurement models.

Question 8

Market risk charge tells us the average of the losses in the tail of the distribution beyond the 99th percentile.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is true?

Accepted Answer

A) VaR corresponds to a specific point of loss on the probability distribution.It does not provide information about the potential size of the loss that exceeds it. 
B) VaR completely ignores the patterns and the severity of the losses in the extreme tail. 
C) VaR gives only partial information about the extent of possible losses, particularly when probability distributions are non-normal. 
D) All of the listed options are correct. 
A) VaR corresponds to a specific point of loss on the probability distribution.It does not provide information about the potential size of the loss that exceeds it. 
B) VaR completely ignores the patterns and the severity of the losses in the extreme tail. 
C) VaR gives only partial information about the extent of possible losses, particularly when probability distributions are non-normal. 
D) All of the listed options are correct.

Question 10

Which of the following statements is true?

Accepted Answer

A) Systematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's vega and the volatility of the market portfolio. 
B) Unsystematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's vega and the volatility of the market portfolio. 
C) Systematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's beta and the volatility of the market portfolio. 
D) Unsystematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's beta and the volatility of the market portfolio. 
A) Systematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's vega and the volatility of the market portfolio. 
B) Unsystematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's vega and the volatility of the market portfolio. 
C) Systematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's beta and the volatility of the market portfolio. 
D) Unsystematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's beta and the volatility of the market portfolio.

Question 11

Which of the following statements is true?

Accepted Answer

A) In a well-diversified portfolio, unsystematic risk can be largely diversified away, leaving behind systematic risk. 
B) In a well-diversified portfolio, systematic risk can be largely diversified away, leaving behind unsystematic risk. 
C) In a well-diversified portfolio, both systematic and unsystematic risk can be largely diversified away. 
D) No matter how well diversified a portfolio is, unsystematic and systematic risk always exist. 
A) In a well-diversified portfolio, unsystematic risk can be largely diversified away, leaving behind systematic risk. 
B) In a well-diversified portfolio, systematic risk can be largely diversified away, leaving behind unsystematic risk. 
C) In a well-diversified portfolio, both systematic and unsystematic risk can be largely diversified away. 
D) No matter how well diversified a portfolio is, unsystematic and systematic risk always exist.

Question 12

Which of the following statements is true?

Accepted Answer

A) DEAR acknowledges that an FI can sell all its bonds tomorrow, as markets are entirely liquid. 
B) DEAR assumes that an FI cannot sell all its bonds tomorrow, although in reality this might be possible. 
C) DEAR assumes that an FI can sell all its bonds tomorrow, although in reality it might take many days for the FI to unload its position. 
D) DEAR acknowledges that an FI cannot sell all its bonds tomorrow, but that instead it might take many days for the FI to unload its position. 
A) DEAR acknowledges that an FI can sell all its bonds tomorrow, as markets are entirely liquid. 
B) DEAR assumes that an FI cannot sell all its bonds tomorrow, although in reality this might be possible. 
C) DEAR assumes that an FI can sell all its bonds tomorrow, although in reality it might take many days for the FI to unload its position. 
D) DEAR acknowledges that an FI cannot sell all its bonds tomorrow, but that instead it might take many days for the FI to unload its position.

Question 13

Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?

Accepted Answer

RiskMetrics model (or the variance/covar

Question 14

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points.What is the bond's price volatility (round to two decimals)?

Accepted Answer

A) 2.45 * 0.00165 = 0.40% 
B) -2.45 * 0.00165 = -0.40% 
C) 2.45 * 0.0165 = 4.04% 
D) -2.45 * 0.0165 = -4.04% 
A) 2.45 * 0.00165 = 0.40% 
B) -2.45 * 0.00165 = -0.40% 
C) 2.45 * 0.0165 = 4.04% 
D) -2.45 * 0.0165 = -4.04%

Question 15

How can basis risk arise in an FI's operations?

Accepted Answer

A) Basis risk arises because loan rates and deposit rates are inversely related in their movements over time. 
B) Basis risk arises because loan rates and deposit rates are perfectly correlated in their movements over time. 
C) Basis risk arises because loan rates and deposit rates are not correlated in their movements over time. 
D) Basis risk arises because loan rates and deposit rates are not perfectly related in their movements over time. 
A) Basis risk arises because loan rates and deposit rates are inversely related in their movements over time. 
B) Basis risk arises because loan rates and deposit rates are perfectly correlated in their movements over time. 
C) Basis risk arises because loan rates and deposit rates are not correlated in their movements over time. 
D) Basis risk arises because loan rates and deposit rates are not perfectly related in their movements over time.

Question 16

Which of the following statements is true?

Accepted Answer

A) Beta is a measure of systematic risk reflecting the co-movement of the returns on a specific share with returns on shares in the same industry 
B) Beta is a measure of unsystematic risk reflecting the co-movement of the returns on a specific share with returns on shares in the same industry. 
C) Beta is a measure of unsystematic risk reflecting the co-movement of the returns on a specific share with returns on the market portfolio. 
D) Beta is a measure of systematic risk reflecting the co-movement of the returns on a specific share with returns on the market portfolio. 
A) Beta is a measure of systematic risk reflecting the co-movement of the returns on a specific share with returns on shares in the same industry 
B) Beta is a measure of unsystematic risk reflecting the co-movement of the returns on a specific share with returns on shares in the same industry. 
C) Beta is a measure of unsystematic risk reflecting the co-movement of the returns on a specific share with returns on the market portfolio. 
D) Beta is a measure of systematic risk reflecting the co-movement of the returns on a specific share with returns on the market portfolio.

Question 17

Assume an FI holds three different positions.The following DEAR information is available for the positions.Position 1 is a five-year zero-coupon bonds with DEAR of $12 500, position 2 is a CHF spot contract with DEAR of $9500 and the third position are Australian equities with DEAR of $34 500.Which of the following statements is true in relation to these positions?

Accepted Answer

A) The DEAR of the portfolio can be calculated by simply adding up the individual DEARs. 
B) The DEAR of the portfolio can be calculated by simply multiplying the individual DEARs. 
C) The DEAR of the portfolio can be calculated by simply adding up the individual DEARs and adjusting the sum by an error factor gamma. 
D) None of the listed options are correct. 
A) The DEAR of the portfolio can be calculated by simply adding up the individual DEARs. 
B) The DEAR of the portfolio can be calculated by simply multiplying the individual DEARs. 
C) The DEAR of the portfolio can be calculated by simply adding up the individual DEARs and adjusting the sum by an error factor gamma. 
D) None of the listed options are correct.

Question 18

Which of the following is an advantage of the back simulation approach?

Accepted Answer

A) simplicity 
B) assumption of normally distributed asset returns 
C) calculation of correlations of asset returns 
D) All of the listed options are correct. 
A) simplicity 
B) assumption of normally distributed asset returns 
C) calculation of correlations of asset returns 
D) All of the listed options are correct.

Question 19

Assume an FI's daily earnings at risk are $5000 and that the FI is required to hold its position for 10 days.What is the position's VAR (round to two decimals)?

Accepted Answer

A) $5000 * $ \sqrt10$ = $15,811.39 
B) $5000 * $ \sqrt{(10 - 1)}$ = $15,000.00 
C)  $ \sqrt{\$5000}$ * 10 = $707.11 
D) $ \sqrt{\$5000}$ * (10 - 1) = $636.40 
A) $5000 * $ \sqrt10$ = $15,811.39 
B) $5000 * $ \sqrt{(10 - 1)}$ = $15,000.00 
C)  $ \sqrt{\$5000}$ * 10 = $707.11 
D) $ \sqrt{\$5000}$ * (10 - 1) = $636.40

Question 20

Define the following terms within the context of the BIS standardised framework:
a.specific risk charge
b.general market risk charge
c.vertical offsets
d.horizontal offset

Accepted Answer

a.Specific risk charge: a charge reflect

Which of the following statements is true?

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25%.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

A major advantage is that RiskMetrics directly provides a worst-case scenario number, while this is not the case for back simulation.

Which of the following statements is true?

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Describe the process of the partial risk factor approach.

Which of the following statements is true?

Market risk charge tells us the average of the losses in the tail of the distribution beyond the 99th percentile.

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points.What is the bond's price volatility (round to two decimals)?

How can basis risk arise in an FI's operations?

Which of the following statements is true?

Which of the following is an advantage of the back simulation approach?

Assume an FI's daily earnings at risk are $5000 and that the FI is required to hold its position for 10 days.What is the position's VAR (round to two decimals)?

Define the following terms within the context of the BIS standardised framework: a.specific risk charge b.general market risk charge c.vertical offsets d.horizontal offset

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risks

Capital Management and Adequacy

Filters

Exam 9: Market Risk

Which of the following statements is true?

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25%.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

A major advantage is that RiskMetrics directly provides a worst-case scenario number, while this is not the case for back simulation.

Which of the following statements is true?

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Describe the process of the partial risk factor approach.

Which of the following statements is true?

Market risk charge tells us the average of the losses in the tail of the distribution beyond the 99th percentile.

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points.What is the bond's price volatility (round to two decimals)?

How can basis risk arise in an FI's operations?

Which of the following statements is true?

Which of the following is an advantage of the back simulation approach?

Assume an FI's daily earnings at risk are $5000 and that the FI is required to hold its position for 10 days.What is the position's VAR (round to two decimals)?

Define the following terms within the context of the BIS standardised framework: a.specific risk charge b.general market risk charge c.vertical offsets d.horizontal offset

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risks

Capital Management and Adequacy

Filters