Exam 4 Chapter 15

The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was
A. interest rate risk.
B. market risk.
C. sovereign risk.
D. firm-specific risk.
E. systematic risk.

market risk.

Conceptually, an FI's trading portfolio can be differentiated from its investment portfolio by
A. liquidity.
B. time horizon.
C. size of assets.
D. effects of interest rate changes.
E. liquidity and time horizon.

liquidity and time horizon.

Regulators usually view tradable assets as those held for horizons of
A. less than one year.
B. greater than one year.
C. less than a quarter.
D. less than a week.
E. less than three years.

less than one year.

Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions?
A. Interest rate risk.
B. Credit risk.
C. Sovereign risk.
D. Market risk.
E. Defa

Market risk.

The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods
A. is the trading portfolio.
B. is the investment portfolio.
C. contains only long term derivatives.
D. is subject to regulatory

is the investment portfolio.

How can market risk be defined in absolute terms?
A. A dollar exposure amount or as a relative amount against some benchmark.
B. The gap between promised cash flows from loans and securities and realized cash flows.
C. The change in value of an FI's asset

A dollar exposure amount or as a relative amount against some benchmark.

Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?
A. Regulation.
B. Resource allocation.
C. Management information.
D. Setting limits.
E. Performance evaluation.

Management information.

Market risk measurement considers the return-risk ratio of traders, which may allow a more rational compensation system to be put in place. Thus market risk measurement (MRM) aids in
A. regulation.
B. resource allocation.
C. management information
D. sett

performance evaluation.

Using market risk management (MRM) to identify the potential return per unit of risk in different areas by comparing returns to market risk so that more capital and resources can be directed to preferred trading areas is considered to be which of the foll

Resource allocation.

A reason for the use of market risk management (MRM) for the purpose of identifying potential misallocations of resources caused by prudential regulation is which of the following?
A. Regulation.
B. Resource allocation.
C. Management information.
D. Setti

Regulation.

The earnings at risk for an FI is a function of
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 the options.

All of the options.

In calculating the value at risk (VAR) of fixed-income securities in the RiskMetrics model,
A. the VAR is related in a linear manner to the DEAR.
B. the price volatility is the product of the modified duration and the adverse yield change.
C. the yield ch

the price volatility is the product of the modified duration and the adverse yield change and the yield changes are assumed to be normally distributed.

Daily earnings at risk (DEAR) is calculated as
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

the dollar value of a position times the price volatility.

When using the RiskMetrics model, price volatility is calculated as
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 yie

the price sensitivity times an adverse daily yield move.

In the RiskMetrics model, value at risk (VAR) is calculated as
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 mo

DEAR times the ?N.

Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?
A. Common stock.
B. Preferred stock.
C. Option contracts.
D. Consol bonds.
E. 30-year U.S. Treasury bonds.

Option contracts.

Which of the following is a problem encountered while using more observations in the back simulation approach?
A. Past observations become decreasingly relevant in predicting VAR in the future.
B. Calculations become highly complex.
C. Need to assume a sy

Past observations become decreasingly relevant in predicting VAR in the future.

Considering the Capital Asset Pricing Model, which of the following observations is incorrect?
A. In a well-diversified portfolio, unsystematic risk can be largely diversified away.
B. Systematic risk is considered to be a diversifiable risk.
C. Total ris

Systematic risk is considered to be a diversifiable risk.

If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be
A. less than 1.
B. greater than 1.
C. equal to 0.
D. equal to 1.
E. negative.

equal to 1.

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is
A. unsystematic risk.
B. default risk.
C. timing risk.
D. interest rate risk.
E. systematic risk.

unsystematic risk.

The capital requirements of internally generated market risk exposure estimates can be met
A. only with two types of capital.
B. only with Tier 1, Tier 2, or Tier 3 capital.
C. with retained earnings and common stock only.
D. only with retained earnings,

with retained earnings and common stock only.

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?
A. Back simulation is less complex.
B. Back simulation creates a higher degree of confidence in the

Back simulation creates a higher degree of confidence in the estimates.

An advantage of the historic or back simulation model for quantifying market risk includes
A. calculation of a standard deviation of returns is not required.
B. all return distributions must be symmetric and normal.
C. the systematic risk of the trading p

calculation of a standard deviation of returns is not required.

A disadvantage of the historic or back simulation model for quantifying market risk includes
A. calculation of a standard deviation of returns is not required.
B. calculation of the correlation between asset returns is not required.
C. estimates of past r

estimates of past returns used in the model may not be relevant to the current market returns.

Which of the following is a method that may overcome weaknesses in the historic or back simulation model?
A. The use of smaller sample sizes to estimate return distributions.
B. Weight sample size observations so that the more recent observations contribu

Weight sample size observations so that the more recent observations contribute a larger amount to the model.

Which approach to measuring market risk, in effect, amounts to simulating or creating artificial trading days and FX rate changes?
A. Back simulation approach.
B. Variance/covariance approach.
C. Monte Carlo simulation approach.
D. RiskMetrics Model.
E. A

Monte Carlo simulation approach

The use of expected shortfall (ES) is most appropriate when
A. there is a small sample size used to estimate probability distributions.
B. the VAR indicates there is no possibility of losses so another method must be used to determine market risk.
C. the

the probability distribution indicates there is a possibility of a "fat tail" loss.

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?
A. There is a very small sample size (<30 observations) used to estimate probability distributions.
B. That the probability distribution is skewed to

That changes in asset prices are normally distributed but with fat tails.

To measure market risk at the 1 percent level of risk, what is the scaling factor for the value at risk (VAR) and the expected shortfall (ES) respectively?
A. 2.33 and 2.665
B. 1.65 and 2.063
C. 1.65 and 2.665
D. 2.33 and 2.063
E. none of the options is t

2.33 and 2.665

MMC Bank has an equity trading portfolio that consists of long positions of 2,750 shares of McDonald's Corp. at a price of $97.50; 3,500 shares of Duke Energy at a price of $65.00; and 1,000 share of the Swiss firm USB Bancorp at a price of $47.50. In add

$116,044.60
Refer to Example 15-8 for risk bucket determination, risk weights for each bucket, and correlation parameters. Additionally, the following formulas (also from example 15-8) are used:
Bucket risk exposure:where ?ij is the correlation parameter

Cornbelt Bank's trading portfolio has the following equity positions: long 1,250 shares of Rio Tinto, a London mining and basic materials company, at a price of $40.00; long 2,500 shares of Intel at a price of $32.50; long 3,500 shares of Exxon/Mobile at

$118,211.98
Refer to Example 15-8 for risk bucket determination, risk weights for each bucket, and correlation parameters. Additionally, the following formulas (also from example 15-8) are used:
Bucket risk exposure:where ?ij is the correlation parameter

The DEAR 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 10-day VAR?
A. $5,000.
B. $10,000.
C. $15,811.
D. $22,361.
E. $50,000.

$15,811.

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

$22,361.

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 (o

33.0%.

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 95 percent confidence (o

39.2%.

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 98 percent confidence (o

46.6%.

City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent.
What is the modified duration of these bonds?
A. 5.45 years.
B. 6.00 years.
C. 6.60 years.
D. 10.0 years.
E. 10.9 years.

5.45 years.

City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent.
What is the price volatility if the maximum potential adverse move in yields is estimated at 20 basis points?
A. -1.32 pe

-1.09 percent.

City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent.
What is the daily earnings at risk (DEAR) of this bond portfolio?
A. -$246,111.
B. -$218,180.
C. -$135,474.
D. -$149,021.

-$218,180.

City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent.
What is the 10-day VAR assuming the daily returns are independently distributed?
A. -$714,009.31
B. -$778,270.16
C. -$389

-$389,135.09

Sumitomo Bank's risk manager has estimated that the DEARs 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 DEAR of Sumitomo's trading portfolio if the correlation

-$400,000.

Sumitomo Bank's risk manager has estimated that the DEARs 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 DEAR of Sumitomo's trading portfolio if the correlation

-$400,000.

Sumitomo Bank's risk manager has estimated that the DEARs 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 DEAR of Sumitomo's trading portfolio if the correlation

-$380,789.

Sumitomo Bank's risk manager has estimated that the DEARs 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 DEAR of Sumitomo's trading portfolio if the correlation

-$291,548.

Sumitomo Bank's risk manager has estimated that the DEARs 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 DEAR of Sumitomo's trading portfolio if the correlation

-$100,000.

Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio, foreign exchange and bonds, are -$150,000 and -$250,000, respectively.
What is the 10-day VAR of Sumitomo's trading portfolio if the correlation

-$316,228.

On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were �92/$ and Swf1.89/$.
What were the respective positions of the two currencies in dollars?
A. $2,173,913 and $94,

$2,173,913 and $26,455,026.

On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were �92/$ and Swf1.89/$.
What is the value of delta for the respective positions of the two currencies in dollars?
A

-$21,524 and -$261,930.

On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were �92/$ and Swf1.89/$.
Over the past 500 days, the 25th worst day for adverse exchange rate changes saw a change i

-$96,332.

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):
SECURITY PROBABILITY PAYOFF
Alpha 0.50 355 0.49 1500.01 ?300
SECURITY PROBABILITY PAYO

+$248 and +$248

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):
SECURITY PROBABILITY PAYOFF
Alpha 0.50 355 0.49 1500.01 ?300
SECURITY PROBABILITY PAYO

$300 and $300

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):
SECURITY PROBABILITY PAYOFF
Alpha 0.50 355 0.49 1500.01 ?300
SECURITY PROBABILITY PAYO

?$3 and ?$25.50

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):
SECURITY PROBABILITY PAYOFF
Alpha 0.50 355 0.49 1500.01 ?300
SECURITY PROBABILITY PAYO

According to the expected shortfall measure, if tomorrow is a bad trading day, losses will exceed $25 million.

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):
SECURITY PROBABILITY PAYOFF
Alpha 0.50 355 0.49 1500.01 ?300
SECURITY PROBABILITY PAYO

+$248; ?$2,000; ?$2000