Market Risk Contest

Q1. Which of the following risk results from the nature of market risk rather than the nature of market variables?

• A. Interest rate risk

• B. Commodities risk

• C. Volatility risk

Duration is:

• The sensitivity of the price of a bond to changes in interest rates

• The sensitivity of the price of a bond to changes in time

• The sensitivity of the price of a bond to changes in the coupon rate

Which of the following methods of calculating VaR does not make assumptions on the distribution of the risk factors?

• A. Monte Carlo Simulation

• B. Variance Covariance

• C. Historical Simulation

Which area in a financial institution would be responsible for setting the risk appetite?

• Senior Management (Board)

• Risk Area

• Middle office

Expected Shortfall is:

• A. The value of a variable Y that leaves x% of the population of the distribution below (to the left)

• B. The average of the values of the variable Y that fall below the percentile X of a distribution

• C. The difference between the maximum likely loss predicted by VaR and the actual loss a financial institution may incur

Which of the following measures uses the relative changes in the interest rates as an output?

• A. Absolute Sensitivity

• B. Modified Duration

• C. Duration

Which measures we would use to obtain the closest approximation of the change in the price of a bond as a result of changes in interest rates?

• A. Absolute Sensitivity + Convexity

• B. Duration + Absolute Sensitivity

• C. Duration + Modified Duration

Which of the following is the main disadvantage of using Historical Simulation for calculating VaR?

• It makes an assumption on the distribution of the risk factors

• It requires a large amount of historical data

• It does not incorporate ‘fat-tails’

Which methods can manage non-linear risk when calculating VaR?

• A. Monte Carlo and Variance – Covariance

• B. Monte Carlo and Historical Simulation

• C. Historical Simulation and Variance-Covariance

When using Monte Carlo simulation for calculating VaR the common assumption is that the price movements follow a:

• A. Normal Distribution

• B. Log normal distribution

• C. Chi-squared distribution