Question 1

Which of the following best describes the delta normal method?

Accepted Answer

A)  a method of managing a delta hedge to assure a low gamma 
B)  the historical method when the distribution is normal 
C)  the Monte Carlo method when price changes are normally distributed 
D)  the analytical method applied to options 
E)  a method of measuring changes in an option's delta 
A)  a method of managing a delta hedge to assure a low gamma 
B)  the historical method when the distribution is normal 
C)  the Monte Carlo method when price changes are normally distributed 
D)  the analytical method applied to options 
E)  a method of measuring changes in an option's delta D

Question 2

Value at Risk provides an estimate of the worst possible loss a firm can incur with a given probability.

Accepted Answer

A) True 
 B)False  False

Question 3

Systemic risk is

Accepted Answer

A)  the risk of a failure of the entire financial system 
B)  the risk associated with broad market movements 
C)  the risk of a failure of a firm's financial risk management system 
D)  the risk of large price movements throughout the financial system 
E)  none of the above 
A)  the risk of a failure of the entire financial system 
B)  the risk associated with broad market movements 
C)  the risk of a failure of a firm's financial risk management system 
D)  the risk of large price movements throughout the financial system 
E)  none of the above A

Question 4

Stress testing is one method of estimating Value at Risk.

Accepted Answer

A) True 
 B)False

Question 5

What is the reason for undertaking a gamma hedge?

Accepted Answer

A)  government regulation 
B)  the possibility of counterparty default 
C)  changes in volatility 
D)  large movements in the underlying 
E)  none of the above 
A)  government regulation 
B)  the possibility of counterparty default 
C)  changes in volatility 
D)  large movements in the underlying 
E)  none of the above

Question 6

A bond subject to default is equivalent to

Accepted Answer

A)  a payer swaption 
B)  a call and a default-free bond 
C)  a put and a call 
D)  a default-free bond and a short put 
E)  none of the above 
A)  a payer swaption 
B)  a call and a default-free bond 
C)  a put and a call 
D)  a default-free bond and a short put 
E)  none of the above

Question 7

Which of the following is not a method for computing Value at Risk?

Accepted Answer

A)  Analytical method 
B)  Variance-covariance method 
C)  Comprehensive method 
D)  Historical method 
E)  Delta normal method 
A)  Analytical method 
B)  Variance-covariance method 
C)  Comprehensive method 
D)  Historical method 
E)  Delta normal method

Question 8

Legal risk is the risk that the government will declare derivatives illegal.

Accepted Answer

A) True 
 B)False

Question 9

Companies can benefit from risk management if their incomes fluctuate across different tax brackets.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.

Accepted Answer

A)  the probability is 5 percent that the firm will lose at least $5 million in one year 
B)  the probability is at least 5 percent that the firm will lose $5 million in one year 
C)  the probability is 5 percent that the firm will lose $5 million in one year 
D)  the probability is less than 5 percent that the firm will lose $5 million in one year 
E)  none of the above 
A)  the probability is 5 percent that the firm will lose at least $5 million in one year 
B)  the probability is at least 5 percent that the firm will lose $5 million in one year 
C)  the probability is 5 percent that the firm will lose $5 million in one year 
D)  the probability is less than 5 percent that the firm will lose $5 million in one year 
E)  none of the above

Question 11

A delta-hedged position is one in which the

Accepted Answer

A)  combined spot and derivatives positions have a delta of one. 
B)  spot position has a delta of zero. 
C)  derivatives position has a delta of zero. 
D)  combined spot and derivatives positions have a delta of zero. 
E)  combined spot and derivatives positions have a gamma of zero. 
A)  combined spot and derivatives positions have a delta of one. 
B)  spot position has a delta of zero. 
C)  derivatives position has a delta of zero. 
D)  combined spot and derivatives positions have a delta of zero. 
E)  combined spot and derivatives positions have a gamma of zero.

Question 12

Netting allows a significant reduction in credit risk but increases market risk

Accepted Answer

A) True 
 B)False

Question 13

A total return swap is best described as

Accepted Answer

A)  A swap in which the payments include only capital gains 
B)  a swap in which the total return on a stock index is swapped for the total return on a bond 
C)  a swap in which the return on one bond is swapped for some other payment 
D)  a swap designed to substitute for a basis swap 
E)  none of the above 
A)  A swap in which the payments include only capital gains 
B)  a swap in which the total return on a stock index is swapped for the total return on a bond 
C)  a swap in which the return on one bond is swapped for some other payment 
D)  a swap designed to substitute for a basis swap 
E)  none of the above

Question 14

The equity of a company with leverage is a put option on the assets.

Accepted Answer

A) True 
 B)False

Question 15

The risk that errors can occur in inputs to a pricing model is called

Accepted Answer

A)  input risk 
B)  model risk 
C)  pricing risk 
D)  valuation risk 
E)  none of the above 
A)  input risk 
B)  model risk 
C)  pricing risk 
D)  valuation risk 
E)  none of the above

Question 16

One reason firms manage risk with derivatives is to lower bankruptcy costs.

Accepted Answer

A) True 
 B)False

Question 17

Current credit risk is encountered is by only one party at a time in a swap.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is not true about a credit spread option?

Accepted Answer

A)  it is an option on the spread of a bond over a reference bond 
B)  its value would change with changes in investors' perceptions of a party's credit quality 
C)  it requires payment of a premium up front 
D)  it requires that the underlying bond be relatively liquid 
E)  none of the above 
A)  it is an option on the spread of a bond over a reference bond 
B)  its value would change with changes in investors' perceptions of a party's credit quality 
C)  it requires payment of a premium up front 
D)  it requires that the underlying bond be relatively liquid 
E)  none of the above

Question 19

Which of the following are not methods of determining the VAR?

Accepted Answer

A)  simulation method 
B)  historical method 
C)  estimation method 
D)  analytical method 
E)  none of the above 
A)  simulation method 
B)  historical method 
C)  estimation method 
D)  analytical method 
E)  none of the above

Question 20

The historical method of estimating Value at Risk uses the performance of the portfolio over the last ten years.

Accepted Answer

A) True 
 B)False

Which of the following best describes the delta normal method?

Value at Risk provides an estimate of the worst possible loss a firm can incur with a given probability.

Systemic risk is

Stress testing is one method of estimating Value at Risk.

What is the reason for undertaking a gamma hedge?

A bond subject to default is equivalent to

Which of the following is not a method for computing Value at Risk?

Legal risk is the risk that the government will declare derivatives illegal.

Companies can benefit from risk management if their incomes fluctuate across different tax brackets.

Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.

A delta-hedged position is one in which the

Netting allows a significant reduction in credit risk but increases market risk

A total return swap is best described as

The equity of a company with leverage is a put option on the assets.

The risk that errors can occur in inputs to a pricing model is called

One reason firms manage risk with derivatives is to lower bankruptcy costs.

Current credit risk is encountered is by only one party at a time in a swap.

Which of the following statements is not true about a credit spread option?

Which of the following are not methods of determining the VAR?

The historical method of estimating Value at Risk uses the performance of the portfolio over the last ten years.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Managing Risk in an Organization

Filters

Exam 15: Financial Risk Management Techniques and Appplications

Which of the following best describes the delta normal method?

Value at Risk provides an estimate of the worst possible loss a firm can incur with a given probability.

Systemic risk is

Stress testing is one method of estimating Value at Risk.

What is the reason for undertaking a gamma hedge?

A bond subject to default is equivalent to

Which of the following is not a method for computing Value at Risk?

Legal risk is the risk that the government will declare derivatives illegal.

Companies can benefit from risk management if their incomes fluctuate across different tax brackets.

Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.

A delta-hedged position is one in which the

Netting allows a significant reduction in credit risk but increases market risk

A total return swap is best described as

The equity of a company with leverage is a put option on the assets.

The risk that errors can occur in inputs to a pricing model is called

One reason firms manage risk with derivatives is to lower bankruptcy costs.

Current credit risk is encountered is by only one party at a time in a swap.

Which of the following statements is not true about a credit spread option?

Which of the following are not methods of determining the VAR?

The historical method of estimating Value at Risk uses the performance of the portfolio over the last ten years.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Managing Risk in an Organization

Filters