BM_Week 6

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

• 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.

Reasons why market risk measurement is important include:

• A. management information.

• B. resource allocation.

• C. performance evaluation.

• D. All of the listed options are correct.

Which of the following statements is true?

• A. The major models used by banks in calculating market risk exposures are RiskMetrics, Monaco simulation and Historic

  (back) calculation.

• B. The major models used by banks in calculating market risk exposures are CreditMetrics, Monte Carlo simulation and

  Historic (back) calculation.

• C. The major models used by banks in calculating market risk exposures are RiskMetrics, Monte Carlo simulation and

  Historic (back) calculation.

• D. The major models used by banks in calculating market risk exposures are CreditMetrics, Monte Carlo simulation and

  Forward calculation.

Which of the following statements is true?

• A. Daily earnings at risk are defined as the dollar market value of a position plus the price sensitivity of the position plus

  the potential adverse move in yield.

• B. Daily earnings at risk are defined as the dollar market value of a position multiplied by the price sensitivity of the

  position multiplied by the potential adverse move in yield.

• C. Daily earnings at risk are defined as (the dollar market value of a position plus the price sensitivity of the position)

  multiplied by the potential adverse move in yield.

• D. Daily earnings at risk are defined as the dollar market value of a position divided by (the price sensitivity of the position

  plus the potential adverse move in yield).

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)?

• A. 0.40%.

• B. –0.40%.

• C. 4.04%.

• D. –4.04%.

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)?

• A. $150.00

• B. $1500.00

• C. $15 000.00

• D. Not enough information to solve the question.

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:

• 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.

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)?

• $15 811.39

• $15 000.00

• $707.11

• $636.40

Suppose an FI holds a $2 000 000 trading portfolio with an average beta of 1.0. Over the last year, the daily return on the stock market index was 3 per cent. How much does the FI stand to lose in earnings if adverse stock market returns materialise tomorrow?

• $60 000

• $60 000

• $99 000

• $139 800

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)?

• $210 600.00

• EUR 210 600.00

• $189 933.52

• EUR 189 933.52