Question 1

One benefit of the historic or back simulation approach is that it does not need calculation of standard deviations and correlations (or assume normal distributions for asset returns) to calculate the portfolio risk figures.

Accepted Answer

A) True 
 B)False  True

Question 2

Market risk is defined as the risk related to the uncertainty of an FI's:

Accepted Answer

A)  earnings on its trading portfolio caused by changes in market conditions.
B)  reputation caused by changes in market conditions.
C)  solvency caused by the default by specific markets (industries) .
D)  funding capacity in money markets or in capital markets. A

Question 3

Assume an FI holds a foreign exchange position of EUR 200 000 and further assume that the dollar per unit of EUR rate is $1.053/EUR.What is the dollar value of the position (round to two decimals)?

Accepted Answer

A)  EUR 200 000 * 1.053 = $210 600.00
B)  EUR 200 000 * 1.053 = EUR 210 600.00
C)  EUR 200 000 / 1.053 = $189 933.52
D)  EUR 200 000 / 1.053 = EUR 189 933.52 C

Question 4

Which of the following statements is true?

Accepted Answer

A)  The relative illiquidity of a market reduces an FI's losses.
B)  The relative illiquidity of a market exposes an FI to magnified losses.
C)  The relative illiquidity of a market does not influence an FI's loss size.
D)  None of the listed options are correct.

Question 5

Which of the following is a measure of systematic risk?

Accepted Answer

A)  alpha
B)  beta
C)  gamma
D)  sigma

Question 6

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points.What is the bond's price volatility (round to two decimals)?

Accepted Answer

A)  2.45 * 0.00165 = 0.40%.
B)  -2.45 * 0.00165 = -0.40%.
C)  2.45 * 0.0165 = 4.04%.
D)  -2.45 * 0.0165 = -4.04%.

Question 7

Which of the following statements is true?

Accepted Answer

A)  Daily price volatility is calculated as the price sensitivity to a small change in yield multiplied by the adverse daily yield move.
B)  Daily price volatility is calculated as the negative modified duration of a security multiplied by the adverse daily yield move.
C)  The daily price volatility of a security influences how much an FI might lose in case of adverse market movements.
D)  All of the listed options are correct.

Question 8

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

Accepted Answer

A) True 
 B)False

Question 9

From 1998 to 2010 the market risk capital requirement was uniformly a large proportion of the total risk capital requirements for Australian banks, and losses due to market risk continued to increase during and post the global financial crisis.

Accepted Answer

A) True 
 B)False

Question 10

Consider a VAR of $100 000 for a 95 per cent confidence level.A problem with this information is that while we know that we will lose more than the VAR amount on 5 days out of every 100, we do not know the maximum amount we can lose.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is true?

Accepted Answer

A)  Systematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's vega and the volatility of the market portfolio.
B)  Unsystematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's vega and the volatility of the market portfolio.
C)  Systematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's beta and the volatility of the market portfolio.
D)  Unsystematic risk reflects the co-movement of a stock with the market portfolio, reflected by the stock's beta and the volatility of the market portfolio.

Question 12

Assume that the dollar market value of a position is $100 000 and the price volatility is 1.50 per cent.What are the daily earnings at risk for this position (round to two decimals)?

Accepted Answer

A)  $150.00
B)  $1500.00
C)  $15 000.00
D)  Not enough information to solve the question.

Question 13

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25 per cent.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?

Accepted Answer

A)  $2 683.28
B)  $6 123.72
C)  $200 000.00
D)  $489 897.95

Question 14

Which of the following statements is true?

Accepted Answer

A)  In CAPM, it is assumed that systematic and unsystematic risk are positively correlated.
B)  In CAPM, it is assumed that systematic and unsystematic risk are negatively correlated.
C)  In CAPM, it is assumed that systematic and unsystematic risk are independent of each other.
D)  None of the listed options are correct.

Question 15

Assume an FI's daily earnings at risk are $5000 and that the FI is required to hold its position for 10 days.What is the position's VAR (round to two decimals)?
A)$5000 * $ \surd$10 = $15 811.39
B)$5000 * $ \surd$(10 - 1) = $15 000.00
C)$ \surd$$5000 * 10 = $707.11
D)$ \surd$$5000 * (10 - 1) = $636.40

Accepted Answer

The answer of Assume an FI's daily earnings at risk...

Question 16

Specific risk charge is a charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio.

Accepted Answer

A) True 
 B)False

Question 17

Assume an FI holds three different positions.The following DEAR information is available for the positions.Position 1 is a five-year zero coupon bonds with DEAR of $12 500, position 2 is a CHF spot contract with DEAR of $9500 and the third position are Australian equities with DEAR of $34 500.The five-year zero coupon bonds and the CHF spot position have a negative correlation of 0.5, the correlation between the zero coupon bonds and the Australian equities is positive 0.5 and the correlation between the CHF spot contract and the Australian equities is positive 0.2.What is the DEAR of the portfolio?

Accepted Answer

A)  12 500 + 9500 + 34 500 = $56 500.
B)  12 500(-0.5)  + 9500(0.5)  + 34 500(0.2)  = $5400.
C)  [12 5002 + 95002 + 34 5002 - 2(-0.5) (12 500) (9500)  - 2(0.5) (12 500) (34 500)  - 2(0.2) (9500) (34 500) ]1/2 = $31 514.
D)  [$12 5002 + $95002 + $34 5002 + 2(-0.5) (12 500) (9500)  + 2(0.5) (12 500) (34 500)  + 2(0.2) (9500) (34 500) ]1/2 = $43 363.

Question 18

Which of the following is an advantage of the back simulation approach?

Accepted Answer

A)  simplicity
B)  assumption of normally distributed asset returns
C)  calculation of correlations of asset returns
D)  All of the listed options are correct.

Question 19

Which of the following statements is true?

Accepted Answer

A)  Technically, 90 per cent of the area under a normal distribution lies between +/- 1.65  σ\sigmaσ  from the mean.
B)  Technically, 90 per cent of the area under a normal distribution lies between +/- 2.33  σ\sigmaσ  from the mean.
C)  Technically, 99 per cent of the area under a normal distribution lies between +/- 1.65  σ\sigmaσ  from the mean.
D)  Technically, 99 per cent of the area under a normal distribution lies between +/- 2.33  σ\sigmaσ  from the mean.

Question 20

Which of the following statements is true?

Accepted Answer

A)  There are no major flaws associated with VAR models like RiskMetrics.
B)  One problem associated with VAR models such as RiskMetrics is the assumption of a normal distribution, that is, a skew of 1.
C)  One problem associated with VAR models such as RiskMetrics is that these models ignore the risk in the payments of accrued interest on an FI's debt securities.
D)  None of the listed options are correct.

Exam 9: Market Risk

One benefit of the historic or back simulation approach is that it does not need calculation of standard deviations and correlations (or assume normal distributions for asset returns) to calculate the portfolio risk figures.

Market risk is defined as the risk related to the uncertainty of an FI's:

Assume an FI holds a foreign exchange position of EUR 200 000 and further assume that the dollar per unit of EUR rate is $1.053/EUR.What is the dollar value of the position (round to two decimals) ?

Which of the following statements is true?

Which of the following is a measure of systematic risk?

Assume that the modified duration of a bond is 2.45 years and that the potential adverse move in yield is 16.5 basis points.What is the bond's price volatility (round to two decimals) ?

Which of the following statements is true?

Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.

From 1998 to 2010 the market risk capital requirement was uniformly a large proportion of the total risk capital requirements for Australian banks, and losses due to market risk continued to increase during and post the global financial crisis.

Consider a VAR of $100 000 for a 95 per cent confidence level.A problem with this information is that while we know that we will lose more than the VAR amount on 5 days out of every 100, we do not know the maximum amount we can lose.

Which of the following statements is true?

Assume that the dollar market value of a position is $100 000 and the price volatility is 1.50 per cent.What are the daily earnings at risk for this position (round to two decimals) ?

Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25 per cent.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals) ?

Which of the following statements is true?

Specific risk charge is a charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio.

Which of the following is an advantage of the back simulation approach?

Which of the following statements is true?

Which of the following statements is true?