Question 1

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.E) None of the above
F) A) and D)

Question 2

Which of the following is an adequate definition of the term general market risk charge?

Accepted Answer

A)   A charge reflecting the risk of the decline in the liquidity of the trading portfolio.
B)   A charge reflecting the modified duration and interest rate shocks for each maturity.
C)   A charge reflecting the risk of the decline in the credit risk quality of the trading portfolio.
D)   A charge reflecting the duration and interest rate gaps for each maturity.E) A) and B)
F) None of the above

Question 3

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) ?

Accepted Answer

A)   $5000  ×	imes×   10\sqrt{10}10c-2.7,0,-7.17,-2.7,-13.5,-8c-5.8,-5.3,-9.5,-10,-9.5,-14c0,-2,0.3,-3.3,1,-4c1.3,-2.7,23.83,-20.7,67.5,-54c44.2,-33.3,65.8,-50.3,66.5,-51c1.3,-1.3,3,-2,5,-2c4.7,0,8.7,3.3,12,10s173,378,173,378c0.7,0,35.3,-71,104,-213c68.7,-142,137.5,-285,206.5,-429c69,-144,104.5,-217.7,106.5,-221l0 -0c5.3,-9.3,12,-14,20,-14H400000v40H845.2724s-225.272,467,-225.272,467s-235,486,-235,486c-2.7,4.7,-9,7,-19,7c-6,0,-10,-1,-12,-3s-194,-422,-194,-422s-65,47,-65,47zM834 80h400000v40h-400000z'/>​  = $15 811.39
B)   $5000  ×	imes×   (10−1) \sqrt{(10 - 1) }(10−1) c34,79.3,68.167,158.7,102.5,238c34.3,79.3,51.8,119.3,52.5,120c340,-704.7,510.7,-1060.3,512,-1067l0 -0c4.7,-7.3,11,-11,19,-11H40000v40H1012.3s-271.3,567,-271.3,567c-38.7,80.7,-84,175,-136,283c-52,108,-89.167,185.3,-111.5,232c-22.3,46.7,-33.8,70.3,-34.5,71c-4.7,4.7,-12.3,7,-23,7s-12,-1,-12,-1s-109,-253,-109,-253c-72.7,-168,-109.3,-252,-110,-252c-10.7,8,-22,16.7,-34,26c-22,17.3,-33.3,26,-34,26s-26,-26,-26,-26s76,-59,76,-59s76,-60,76,-60zM1001 80h400000v40h-400000z'/>​  = $15 000.00
C)    $5000\sqrt{\$5000}$5000c-2.7,0,-7.17,-2.7,-13.5,-8c-5.8,-5.3,-9.5,-10,-9.5,-14c0,-2,0.3,-3.3,1,-4c1.3,-2.7,23.83,-20.7,67.5,-54c44.2,-33.3,65.8,-50.3,66.5,-51c1.3,-1.3,3,-2,5,-2c4.7,0,8.7,3.3,12,10s173,378,173,378c0.7,0,35.3,-71,104,-213c68.7,-142,137.5,-285,206.5,-429c69,-144,104.5,-217.7,106.5,-221l0 -0c5.3,-9.3,12,-14,20,-14H400000v40H845.2724s-225.272,467,-225.272,467s-235,486,-235,486c-2.7,4.7,-9,7,-19,7c-6,0,-10,-1,-12,-3s-194,-422,-194,-422s-65,47,-65,47zM834 80h400000v40h-400000z'/>​   ×	imes×  10 = $707.11
D)    $5000\sqrt{\$5000}$5000c-2.7,0,-7.17,-2.7,-13.5,-8c-5.8,-5.3,-9.5,-10,-9.5,-14c0,-2,0.3,-3.3,1,-4c1.3,-2.7,23.83,-20.7,67.5,-54c44.2,-33.3,65.8,-50.3,66.5,-51c1.3,-1.3,3,-2,5,-2c4.7,0,8.7,3.3,12,10s173,378,173,378c0.7,0,35.3,-71,104,-213c68.7,-142,137.5,-285,206.5,-429c69,-144,104.5,-217.7,106.5,-221l0 -0c5.3,-9.3,12,-14,20,-14H400000v40H845.2724s-225.272,467,-225.272,467s-235,486,-235,486c-2.7,4.7,-9,7,-19,7c-6,0,-10,-1,-12,-3s-194,-422,-194,-422s-65,47,-65,47zM834 80h400000v40h-400000z'/>​   ×	imes×  (10 - 1)  = $636.40 E) A) and C)
F) B) and D)

Question 4

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. Which of the following statements is true in relation to these positions?

Accepted Answer

A)   The DEAR of the portfolio can be calculated by simply adding up the individual DEARs.
B)   The DEAR of the portfolio can be calculated by simply multiplying the individual DEARs.
C)   The DEAR of the portfolio can be calculated by simply adding up the individual DEARs and adjusting the sum by an error factor gamma.
D)   None of the listed options are correct.E) B) and C)
F) A) and C)

Question 5

The N-day market value at risk (VAR)  equals daily earning at risk multiplied by the square root of N if we assume that yield shocks are:

Accepted Answer

A)   dependent, that daily volatility is approximately constant and that the FI is 'locked in' to holding the asset in question for N number of days.
B)   independent, that daily volatility is approximately constant and that the FI is 'locked in' to holding the asset in question for N number of days.
C)   dependent, that daily volatility is approximately constant and that the FI is 'locked in' to holding the asset in question for N minus one number of days.
D)   independent, that daily volatility is approximately constant and that the FI is 'locked in' to holding the asset in question for N minus one number of days.E) C) and D)
F) B) and D)

Question 6

Which of the following statements best describes the relationship between total risk, systematic risk and unsystematic risk?

Accepted Answer

A)   Total risk is the product of systematic and unsystematic risk.
B)   Total risk is the sum of systematic and unsystematic risk.
C)   Total risk is the quotient of systematic and unsystematic risk.
D)   Total risk is the difference between systematic and unsystematic risk.E) A) and D)
F) None of the above

Question 7

Which of the following statements is true?

Accepted Answer

A)   DEAR acknowledges that an FI can sell all its bonds tomorrow, as markets are entirely liquid.
B)   DEAR assumes that an FI cannot sell all its bonds tomorrow, although in reality this might be possible.
C)   DEAR assumes that an FI can sell all its bonds tomorrow, although in reality it might take many days for the FI to unload its position.
D)   DEAR acknowledges that an FI cannot sell all its bonds tomorrow, but that instead it might take many days for the FI to unload its position.E) A) and D)
F) None of the above

Question 8

Define the following terms within the context of the BIS standardised framework:
a. specific risk charge
b. general market risk charge
c. vertical offsets
d. horizontal offset.

Accepted Answer

a. Specific risk charge: a charge reflec...

Question 9

The general market risk charges reflect the product of the modified durations and interest rate shocks expected for each maturity.

Accepted Answer

A) True 
 B)False  True

Question 10

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.E) B) and C)
F) A) and D)

Question 11

Which of the following is a measure of systematic risk?

Accepted Answer

A)   alpha
B)   beta
C)   gamma
D)   sigmaE) B) and C)
F) All of the above

Question 12

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. E) A) and B)
F) A) and C)

Question 13

In sequential order, the steps involved in back simulation are as follows: measure exposures, measure sensitivity, measure risk, measure risk again, rank days by risk from worst to best, VAR.

Accepted Answer

A) True 
 B)False

Question 14

Reasons why market risk measurement is important include:

Accepted Answer

A)   management information.
B)   resource allocation.
C)   performance evaluation.
D)   All of the listed options are correct.E) B) and C)
F) All of the above

Question 15

Which of the following are problems associated with the BIS approach to calculating capital requirements for equities?

Accepted Answer

A)   The approach assumes the same systematic risk factor for every stock.
B)   The approach assumes the same unsystematic risk factor for every stock.
C)   The approach does not fully consider the benefits from portfolio diversification.
D)   The approach assumes the same systematic risk factor for every stock and the approach does not fully consider the benefits from portfolio diversification.E) All of the above
F) A) and B)

Question 16

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  False

Question 17

Which of the following statements is true?

Accepted Answer

A)   Unsystematic risk is specific to a particular firm.
B)   Unsystematic risk is specific to a particular industry.
C)   Unsystematic risk is specific to a particular geographical area.
D)   Unsystematic risk relates to the whole market.E) A) and B)
F) B) and D) A

Question 18

What is meant by horizontal offset?

Accepted Answer

A)   The deduction of capital charges because long and short positions of the same maturities have durations that more than perfectly hedge each other.
B)   The assignment of additional capital charges because long and short positions of the same maturities have durations that do not perfectly hedge each other.
C)   The deduction of additional capital because long and short positions of different maturities more than perfectly hedge each other.
D)   The assignment of additional capital charges because long and short positions of different maturities do not perfectly hedge each other.E) B) and C)
F) B) and D)

Question 19

Why is market risk measurement important?

Accepted Answer

Market risk is related to the uncertaint...

Question 20

Market risk is defined as the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes in market conditions.

Accepted Answer

A) True 
 B)False

Exam 9: Market Risk

Correct Answer
verified

Which of the following is an adequate definition of the term general market risk charge?

Correct Answer
verified

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) ?

Correct Answer
verified

Correct Answer
verified

The N-day market value at risk (VAR) equals daily earning at risk multiplied by the square root of N if we assume that yield shocks are:

Correct Answer
verified

Which of the following statements best describes the relationship between total risk, systematic risk and unsystematic risk?

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

Define the following terms within the context of the BIS standardised framework: a. specific risk charge b. general market risk charge c. vertical offsets d. horizontal offset.

Correct Answer
verified
a. Specific risk charge: a charge reflec...
View Answer

The general market risk charges reflect the product of the modified durations and interest rate shocks expected for each maturity.

Correct Answer
verified
True

Which of the following statements is true?

Correct Answer
verified

Which of the following is a measure of systematic risk?

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

In sequential order, the steps involved in back simulation are as follows: measure exposures, measure sensitivity, measure risk, measure risk again, rank days by risk from worst to best, VAR.

Correct Answer
verified

Reasons why market risk measurement is important include:

Correct Answer
verified

Which of the following are problems associated with the BIS approach to calculating capital requirements for equities?

Correct Answer
verified

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.

Correct Answer
verified
False

Which of the following statements is true?

Correct Answer
verified
A

What is meant by horizontal offset?

Correct Answer
verified

Why is market risk measurement important?

Correct Answer
verified
Market risk is related to the uncertaint...
View Answer

Market risk is defined as the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes in market conditions.

Correct Answer
verified

Exam 9: Market Risk

Correct AnswerverifiedShow Answer

Which of the following is an adequate definition of the term general market risk charge?

Correct AnswerverifiedShow Answer

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) ?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The N-day market value at risk (VAR) equals daily earning at risk multiplied by the square root of N if we assume that yield shocks are:

Correct AnswerverifiedShow Answer

Which of the following statements best describes the relationship between total risk, systematic risk and unsystematic risk?

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Define the following terms within the context of the BIS standardised framework: a. specific risk charge b. general market risk charge c. vertical offsets d. horizontal offset.

Correct Answerverifieda. Specific risk charge: a charge reflec...View AnswerShow Answer

The general market risk charges reflect the product of the modified durations and interest rate shocks expected for each maturity.

Correct AnswerverifiedTrue

Which of the following statements is true?

Correct AnswerverifiedShow Answer

Which of the following is a measure of systematic risk?

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

In sequential order, the steps involved in back simulation are as follows: measure exposures, measure sensitivity, measure risk, measure risk again, rank days by risk from worst to best, VAR.

Correct AnswerverifiedShow Answer

Reasons why market risk measurement is important include:

Correct AnswerverifiedShow Answer

Which of the following are problems associated with the BIS approach to calculating capital requirements for equities?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedFalse

Which of the following statements is true?

Correct AnswerverifiedA

What is meant by horizontal offset?

Correct AnswerverifiedShow Answer

Why is market risk measurement important?

Correct AnswerverifiedMarket risk is related to the uncertaint...View AnswerShow Answer

Market risk is defined as the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes in market conditions.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
a. Specific risk charge: a charge reflec...
View Answer

Correct Answer
verified
True

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
False

Correct Answer
verified
A

Correct Answer
verified

Correct Answer
verified
Market risk is related to the uncertaint...
View Answer

Correct Answer
verified