Exam 9: Market Risk

Since 1998 the market risk capital requirement was uniformly a large proportion of the total risk capital requirements for Australian banks, and losses due to market risk continued to increase during and post the global financial crisis.

The general market risk charges reflect the product of the modified durations and interest rate shocks expected for each maturity.

Which of the following statements is true?

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

Which of the following statements is true?

Assume the market value of a position is $100 000 and that its modified duration is 3.30 years.Further assume that the potential adverse move in yield is 16.5 basis points.What are the daily earnings at risk for this position (round to two decimals)?

One benefit of the historic or back simulation approach is that it does not need calculation of standard deviations and correlations (or assume normal distributions for asset returns) to calculate the portfolio risk figures.

Which of the following statements is true?

Reasons why market risk measurement is important include:

Consider a VAR of $100 000 for a 95% confidence level.A problem with this information is that while we know that we will lose more than the VAR amount on 5 days out of every 100, we do not know the maximum amount we can lose.

Assume an FI holds three different positions.The following DEAR information is available for the positions.Position 1 is 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.The five-year zero-coupon bonds and the CHF spot position have a negative correlation of 0.5, the correlation between the zero-coupon bonds and the Australian equities is positive 0.5 and the correlation between the CHF spot contract and the Australian equities is positive 0.2.What is the DEAR of the portfolio?

RiskMetrics weights more recent observations more highly than past observations, which allows more recent news to be more heavily reflected in the calculation of the standard deviation.

Specific risk charge is a charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio.

Which of the following are problems associated with the BIS approach to calculating capital requirements for equities?

Monte Carlo simulations address the problems imposed by a limited number of actual observations, by generating additional observations.

Which of the following statements is true?

Expected shortfall (also referred to as conditional VaR and expected tail loss) tells us the average of the losses in the tail of the distribution beyond the 99th percentile.

Assume the dollar market value of an FI's position is $200 000 with a modified duration of four years.The potential adverse move in the yield is 16.5 basis points.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

Which of the following statements is true?

Market risk is defined as the risk related to the uncertainty of an FI's: