Question 1

What is a default swap and what is its use?

Accepted Answer

A default swap pays very small amounts and a large amount during default.They are used to protect bondholders against default by a bond issuer.

Question 2

Your portfolio is worth $200,000.The standard deviation of its annual returns is 0.20 and the expected return is 11.0%.What is the probability of a loss over 10 business days?

Accepted Answer

A)  39.84% 
B)  49.84% 
C)  59.84% 
D)  69.84% 
A)  39.84% 
B)  49.84% 
C)  59.84% 
D)  69.84% B

Question 3

Matt owns 5,000 share of Matrix at $52.50.To arbitrage this he shorts 5,000 calls and longs 5,000 puts at a strike of $50.00.Assume   = 0.16,σ = 0.30,rf = 0.06,and the options expire in 170 days.What is the value at risk for 1 week at a 95% confidence level?

Accepted Answer

A)  $0 
B)  $16,433 
C)  $18,433 
D)  $20,433 
A)  $0 
B)  $16,433 
C)  $18,433 
D)  $20,433 A

Question 4

You own two bonds; 25% of a 30-year bond with σ = 0.02 and 75% of a 20-year bond with ?σ = 0.015.The correlation coefficient is 0.82.What is the 2-week value at risk at a 95% confidence level? (Assume portfolio value = $15 million.)

Accepted Answer

A)  $0 
B)  $234,357 
C)  $734,357 
D)  $1,734,357 
A)  $0 
B)  $234,357 
C)  $734,357 
D)  $1,734,357

Question 5

Why is VaR an important tool in measuring risk? What are some of its shortcomings? Ask the class to explain the rationale for a company to rely heavily on VaR in the absence of other measurement tools.

Accepted Answer

Value at Risk (VaR) is an important tool

Question 6

Harold owns 10,000 shares of IBM at $54.50 per share.He writes $55 strike covered call on all the shares.Assume   = 0.14,σ = 0.18,rf = 0.04,and the options expire in 90 days.What is the value at risk for 1 day,using the delta approximation at a 95% confidence level?

Accepted Answer

A)  $4,717 
B)  $5,717 
C)  $6,717 
D)  $7,717 
A)  $4,717 
B)  $5,717 
C)  $6,717 
D)  $7,717

Question 7

A stock has a price of $50 and pays no dividend.The historical standard deviation of the stock is 25% and the expected return on the stock is 12%.At the 95% confidence level,what is the Tail VaR over the next 6 months?

Accepted Answer

A)  $2.50 
B)  $13.63 
C)  $22.36 
D)  $47.50 
A)  $2.50 
B)  $13.63 
C)  $22.36 
D)  $47.50

Question 8

How is VaR used in credit risk scenarios?

Accepted Answer

VaR is used to evaluate market

Question 9

What is bootstrapping and what is its use?

Accepted Answer

This is the process of using o

Question 10

Kelly owns 50,000 shares of Microsoft at $63.60 per share.She buys 20,000 $60 strike calls.Assume   = 0.12,σ = 0.23,rf = 0.05,and the options expire in 170 days.What is the value at risk for 2 weeks,using the delta approximation at a 99% confidence level?

Accepted Answer

A)  $311,463 
B)  $411,463 
C)  $511,463 
D)  $611,463 
A)  $311,463 
B)  $411,463 
C)  $511,463 
D)  $611,463

Question 11

Your $2 million portfolio consists of 25% Evans stock with   = 0.16,σ = 0.22 and 75% Indy stock with   = 0.09,σ = 0.12.The correlation coefficient is 0.65.What is the value at risk over 1 day at a 99% confidence level? Assume 252 days per year.

Accepted Answer

A)  $27,976 
B)  $37,976 
C)  $47,976 
D)  $57,976 
A)  $27,976 
B)  $37,976 
C)  $47,976 
D)  $57,976

Question 12

What is implied volatility?

Accepted Answer

It is the standard deviation o

Question 13

Your portfolio is worth $200,000.The standard deviation of its annual returns is 0.20 and the expected return is 11.0%.What is the 2-week value at risk at a 95% confidence level?

Accepted Answer

A)  $12,058 
B)  $13,058 
C)  $14,058 
D)  $15,058 
A)  $12,058 
B)  $13,058 
C)  $14,058 
D)  $15,058

Question 14

Why is recent data more relevant than older data when calculating volatility?

Accepted Answer

Research shows that future nea

Question 15

A bond maturing in 5 years has a YTM = 0.065 and an annual yield volatility of 2.0%.Given a $15 million portfolio,what is the value at risk over 2 weeks at a 95% confidence level?

Accepted Answer

A)  $283,917 
B)  $383,917 
C)  $483,917 
D)  $583,917 
A)  $283,917 
B)  $383,917 
C)  $483,917 
D)  $583,917

Question 16

A stock has a price of $42.63 and pays no dividend.The historical standard deviation of the stock is 18% and the expected return on the stock is 11%.At the 95% confidence level,what is the Tail VaR over the next 270 days?

Accepted Answer

A)  $2.13 
B)  $6.56 
C)  $9.71 
D)  $40.50 
A)  $2.13 
B)  $6.56 
C)  $9.71 
D)  $40.50

Question 17

Use VaR techniques to determine the cost of insurance on a risky investment.The investment asset has a value of $150 and pays no dividend.The historical standard deviation of the asset is 20% and the expected return on the asset is 15%.At the 95% confidence level,what is the price of a put option that insures the asset over the next 6 months?

Accepted Answer

A)  $0.33 
B)  $1.25 
C)  $2.65 
D)  $6.56 
A)  $0.33 
B)  $1.25 
C)  $2.65 
D)  $6.56

Question 18

Your $2 million portfolio consists of 25% Evans stock with   = 0.16,σ = 0.22 and 75% Indy stock with   = 0.09,σ = 0.12.The correlation coefficient is 0.13.What is the value at risk over 1 day at a 99% confidence level? Assume 252 days per year.

Accepted Answer

A)  $21,792 
B)  $31,792 
C)  $41,792 
D)  $51,792 
A)  $21,792 
B)  $31,792 
C)  $41,792 
D)  $51,792

Question 19

You own $4 million of Jacko Corp.The expected return is 14.0% and σ = 0.20.What is the value at risk over 4 weeks at a 99% confidence level?

Accepted Answer

A)  $383,000 
B)  $413,000 
C)  $453,000 
D)  $473,000 
A)  $383,000 
B)  $413,000 
C)  $453,000 
D)  $473,000

Question 20

Your $1 million portfolio consists of 50% of Jacko with   = 0.14,σ = 0.20 and 50% of Macko with   = 0.10,σ = 0.15.The correlation coefficient is 0.25.What is the value at risk over 1 week at a 95% confidence level?

Accepted Answer

A)  $23,447 
B)  $26,447 
C)  $29,447 
D)  $32,447 
A)  $23,447 
B)  $26,447 
C)  $29,447 
D)  $32,447

Exam 26: Value at Risk

What is a default swap and what is its use?

Your portfolio is worth $200,000.The standard deviation of its annual returns is 0.20 and the expected return is 11.0%.What is the probability of a loss over 10 business days?

Matt owns 5,000 share of Matrix at $52.50.To arbitrage this he shorts 5,000 calls and longs 5,000 puts at a strike of $50.00.Assume = 0.16,σ = 0.30,rf = 0.06,and the options expire in 170 days.What is the value at risk for 1 week at a 95% confidence level?

You own two bonds; 25% of a 30-year bond with σ = 0.02 and 75% of a 20-year bond with ?σ = 0.015.The correlation coefficient is 0.82.What is the 2-week value at risk at a 95% confidence level? (Assume portfolio value = $15 million.)

Why is VaR an important tool in measuring risk? What are some of its shortcomings? Ask the class to explain the rationale for a company to rely heavily on VaR in the absence of other measurement tools.

Harold owns 10,000 shares of IBM at $54.50 per share.He writes $55 strike covered call on all the shares.Assume = 0.14,σ = 0.18,rf = 0.04,and the options expire in 90 days.What is the value at risk for 1 day,using the delta approximation at a 95% confidence level?

A stock has a price of $50 and pays no dividend.The historical standard deviation of the stock is 25% and the expected return on the stock is 12%.At the 95% confidence level,what is the Tail VaR over the next 6 months?

How is VaR used in credit risk scenarios?

What is bootstrapping and what is its use?

Kelly owns 50,000 shares of Microsoft at $63.60 per share.She buys 20,000 $60 strike calls.Assume = 0.12,σ = 0.23,rf = 0.05,and the options expire in 170 days.What is the value at risk for 2 weeks,using the delta approximation at a 99% confidence level?

Your $2 million portfolio consists of 25% Evans stock with = 0.16,σ = 0.22 and 75% Indy stock with = 0.09,σ = 0.12.The correlation coefficient is 0.65.What is the value at risk over 1 day at a 99% confidence level? Assume 252 days per year.

What is implied volatility?

Your portfolio is worth $200,000.The standard deviation of its annual returns is 0.20 and the expected return is 11.0%.What is the 2-week value at risk at a 95% confidence level?

Why is recent data more relevant than older data when calculating volatility?

A bond maturing in 5 years has a YTM = 0.065 and an annual yield volatility of 2.0%.Given a $15 million portfolio,what is the value at risk over 2 weeks at a 95% confidence level?

A stock has a price of $42.63 and pays no dividend.The historical standard deviation of the stock is 18% and the expected return on the stock is 11%.At the 95% confidence level,what is the Tail VaR over the next 270 days?

Your $2 million portfolio consists of 25% Evans stock with = 0.16,σ = 0.22 and 75% Indy stock with = 0.09,σ = 0.12.The correlation coefficient is 0.13.What is the value at risk over 1 day at a 99% confidence level? Assume 252 days per year.

You own $4 million of Jacko Corp.The expected return is 14.0% and σ = 0.20.What is the value at risk over 4 weeks at a 99% confidence level?

Your $1 million portfolio consists of 50% of Jacko with = 0.14,σ = 0.20 and 50% of Macko with = 0.10,σ = 0.15.The correlation coefficient is 0.25.What is the value at risk over 1 week at a 95% confidence level?

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, collars, and Other Strategies

Introduction to Risk Management

Financial Forwards and Futures

Commodity Forwards and Futures

Interest Rate Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing: Basic Concepts

Binomial Option Pricing: Selected Topics

The Black-Scholes Formula

Market-Making and Delta-Hedging

Exotic Options: I

Financial Engineering and Security Design

Corporate Applications

Real Options

The Lognormal Distribution

Monte Carlo Valuation

Brownian Motion and Itos Lemma

The Black-Scholes-Merton Equation

Risk-Neutral and Martingale Pricing

Exotic Options: 2

Volatility

Interest Rate and Bond Derivatives

Credit Risk

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