Exam 15: Market Risk

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?

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

Basel III proposes the partial risk factor approach to measuring capital that must be kept against a trading book as a revised standardized approach that FIs may use rather than internal models to measure market risk.

As securitization of assets continues to expand, the management of market risk will become more important to FIs.

Market risk management is important as a source of information on risk exposure for senior management of an FI.

The capital requirements of internally generated market risk exposure estimates can be met

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

The Volcker Rule allows U.S.depository institutions to invest in hedge funds and private equity funds in order to gain more diversification of the trading portfolio.

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

Assets and liabilities that are expected to require extensive time to liquidate are normally placed in the investment portfolio.

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 total DEAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be 1.0?

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

The Bank for International Settlements (BIS) is an organization formed by the largest commercial banks operating in developed markets.

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

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?

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

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)?

Daily price volatility of a bond can be estimated by multiplying the bond's modified duration by the adverse daily yield move.