Exam 15: Financial Risk Management Techniques and Applications

The Monte Carlo simulation method of estimating Value at Risk is one of the most flexible methods because it permits the user to assume any probability distribution.

Which of the following are types of risks faced by a derivatives dealer?

One good reason for practicing risk management is that arbitrage opportunities can be earned.

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

The credit risk in an interest rate swap is smallest at the beginning and at the end of the life of the swap.

Which of the following forms of hedging requires the use of options?

The analytical (variance-covariance)method of estimating Value at Risk requires the assumption of a normal distribution.

Value at Risk estimates for portfolios must take into account the correlations among the various assets and liabilities in a portfolio.

If a firm engages in risk management to capture arbitrage profits,what is it easy to overlook?

A credit default swap is an ordinary swap that is subject to default.

A total return swap is best described as

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

Stress testing allows a firm to see how its portfolio will behave under extremely rare but favorable conditions.

Which of the following is the primary impetus for the growth in the practice of risk management?

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

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

Netting permits a firm to?

In option terms,the limited liability of corporate stockholders is

What is the reason for undertaking a gamma hedge?

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