Question 1

The earnings at risk for an FI is a function of

Accepted Answer

A) the time necessary to liquidate assets. 
B) the potential adverse move in yield. 
C) the dollar market value of the position. 
D) the price sensitivity of the position. 
E) All of these. 
A) the time necessary to liquidate assets. 
B) the potential adverse move in yield. 
C) the dollar market value of the position. 
D) the price sensitivity of the position. 
E) All of these. E

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

The Volker Rule is intended to reduce market risk at U.S. deposit-taking institutions.

Accepted Answer

A) True 
 B)False  True

Question 4

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

Accepted Answer

A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
E) systematic risk. 
A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
E) systematic risk.

Question 5

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):       What is the one-day, 99% confidence level, value at risk (VAR) of securities Alpha and Beta, respectively (in millions)?

Accepted Answer

A) $3 and $25.50 
B) $3 and $0.75 
C) $248 and 248 
D) $300 and $300 
E) 300 and 3,300 
A) $3 and $25.50 
B) $3 and $0.75 
C) $248 and 248 
D) $300 and $300 
E) 300 and 3,300

Question 6

In the BIS standardized framework model, the general market risk weights reflect the product of the modified durations and interest rate shocks.

Accepted Answer

A) True 
 B)False

Question 7

For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VaR) may be very large.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Sumitomo Bank's risk manager has estimated that the VaRs 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 VaR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

Accepted Answer

A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000. 
A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
E) -$400,000.

Question 11

In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for each maturity.

Accepted Answer

A) True 
 B)False

Question 12

The mean change in the value of a portfolio of trading assets has been estimated to be 0 with a standard deviation of 20 percent. Yield changes are assumed to be normally distributed. What is the maximum yield change expected if a 90 percent confidence (one-tailed) limit is used?

Accepted Answer

A) 3.30%. 
B) 20.0%. 
C) 33.0%. 
D) 39.2%. 
E) 46.6%. 
A) 3.30%. 
B) 20.0%. 
C) 33.0%. 
D) 39.2%. 
E) 46.6%.

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

Question 14

Which of the following is a method that may overcome weaknesses in the historic or back simulation model?

Accepted Answer

A) The use of smaller sample sizes to estimate return distributions. 
B) Weight sample size observations so that the more recent observations contribute a larger amount to the model. 
C) Decrease the number of assets in the trading portfolio so that past returns will provide more accuracy to the model. 
D) Increase the number of assets in the trading portfolio in order to benefit from higher levels of diversification. 
E) The weaknesses in the model cannot be overcome. 
A) The use of smaller sample sizes to estimate return distributions. 
B) Weight sample size observations so that the more recent observations contribute a larger amount to the model. 
C) Decrease the number of assets in the trading portfolio so that past returns will provide more accuracy to the model. 
D) Increase the number of assets in the trading portfolio in order to benefit from higher levels of diversification. 
E) The weaknesses in the model cannot be overcome.

Question 15

The VaR of a bank's trading portfolio has been estimated at $5,000. It is assumed that the daily earnings are independently and normally distributed. What is the 20-day VaR?

Accepted Answer

A) $5,000. 
B) $10,000. 
C) $15,811. 
D) $22,361. 
E) $50,000. 
A) $5,000. 
B) $10,000. 
C) $15,811. 
D) $22,361. 
E) $50,000.

Question 16

The VaR of a portfolio of assets is simply the weighted average of each individual assets' VaR.

Accepted Answer

A) True 
 B)False

Question 17

Market value at risk (VaR) is defined as the daily value at risk (VaR) times the number of days (N).

Accepted Answer

A) True 
 B)False

Question 18

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 19

In the Risk Metrics 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 ÖN. 
E) VaR times the ÖN. 
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 ÖN. 
E) VaR times the ÖN.

Question 20

Deposit-taking institutions operating in the U.S. are prohibited from proprietary trading by the Volker Rule.

Accepted Answer

A) True 
 B)False

Exam 15: Market Risk

The earnings at risk for an FI is a function of

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

The Volker Rule is intended to reduce market risk at U.S. deposit-taking institutions.

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

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): What is the one-day, 99% confidence level, value at risk (VAR) of securities Alpha and Beta, respectively (in millions)?

In the BIS standardized framework model, the general market risk weights reflect the product of the modified durations and interest rate shocks.

For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VaR) may be very large.

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

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

Sumitomo Bank's risk manager has estimated that the VaRs 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 VaR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for each maturity.

The mean change in the value of a portfolio of trading assets has been estimated to be 0 with a standard deviation of 20 percent. Yield changes are assumed to be normally distributed. What is the maximum yield change expected if a 90 percent confidence (one-tailed) limit is used?

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

Which of the following is a method that may overcome weaknesses in the historic or back simulation model?

The VaR of a bank's trading portfolio has been estimated at $5,000. It is assumed that the daily earnings are independently and normally distributed. What is the 20-day VaR?

The VaR of a portfolio of assets is simply the weighted average of each individual assets' VaR.

Market value at risk (VaR) is defined as the daily value at risk (VaR) times the number of days (N).

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

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

Deposit-taking institutions operating in the U.S. are prohibited from proprietary trading by the Volker Rule.

Why Are Financial Institutions Special

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