Management of Financial Institutions Ch 10

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?

$15,811

On December 31, 2001 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?

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

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?

$22,361

In calculating the VAR of fixed-income securities in the RiskMetrics model:

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

The earnings at risk for a FI is a function of:

- The time necessary to liquidate assets - The potential adverse move in yield - The dollar market value of the position - The price sensitivity of the position

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 is among assets is assumed to be -1.0?

-$100,000

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 of this bond portfolio?

-$123,055.32

On December 31, 2001 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?

-$21,524 and -$261,930

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 among assets is assumed tobe 0.0?

-$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 10-day VAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?

-$316,228

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 among assets is assumed to be 0.80?

-$380,789

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?

-$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 t he correlation among assets is assumed to be 1.0?

-$400,00

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 correlations among assets are ignored?

-$400,000

On December 31, 2001 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 in the exchange rates of 0.78 percent for the Yen and 0.30 percent for the Swiss Franc. What is the expected VAR exposure on December 31?

-$95,368

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?

-1.09%

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 limit is used?

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 limit is used?

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 99 percent confidence limit is used?

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 on these bonds?

5.45 years

How can market risk be defined in absolute terms?

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

A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the general market risk charge in the BIS framework.

False

Although financial markets deteriorated during the summer of 2009, by September of that year the banking system had returned to normal operation

False

Banks are limited by regulation to using the historic or back simulation method to quantify market risk

False

Banks in the countries that are members of the BIS must use the standardized framework to measure market risk

False

Considering the market risk of traders' portfolios for the purpose of establishing logical position limits per trader in each area of trading is a resource allocation benefit of market risk measurement.

False

Daily earning at risk is defined as the dollar value of a position times price sensitivity

False

In estimating price sensitivity, the JPM model prefers to use modified duration over the present value of cash flow changes.

False

In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for each maturity

False

In the early 2000s, the market risk capital requirement uniformaly was a large proportion of the total risk capital requirements for the largest US banks

False

Income from trading activities of FIs is less important today than the traditional activities of banks

False

Losses among FIs that actively trade mortgage backed securities reached over $3 trillion world wide by mid 2009

False

Market risk is the potential gain caused by an adverse movement in market conditions

False

Market value at risk (VAR) is defined as the daily earning at risk (DEAR) times the number of days (N).

False

One advantage of RiskMetrics over back simulation is that RiskMetrics provides a worst case scenario value

False

The JPM RiskMetrics model is based on the assumption of a binomial distribution of asset returns.

False

The back simulation approach to estimating market risk exposure requires normally distributed asset returns, but does not require correlations of asset returns.

False

Regulators usually view tradable assets as those held for horizons of

Less than one year

Conceptually, a FI's trading portfolio can be differentiated from its investment portfolio by

Liquidity and Time horizon

Which benefit of market risk measurement provides senior management with information on the risk exposure taken by FI traders

Management information

The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was

Market risk

Which term defines the risk related to the uncertainty of a FI's earning on its trading portfolio caused by changes, and particularly extreme changes in market conditions?

Market risk

Market risk measurement considers the return-risk ratio of traders, which may allow a more rational compensation system to be put in place. Thus a market risk measurement aids in:

Performance evaluation

A reason for the use of market risk management for the purpose of identifying potential misallocations of resources caused by prudential regulation is which of the following

Regualtion

Using the MRM to identify the potential return per unit of risk in different areas by comparing returns to market risk in areas of trading so more capital and resources can be directed to these ares is considered to be which of the following?

Resource allocation

Daily earnings at risk is calculated as:

The dollar value of a position times the price volatility

A disadvantage of the back simulation approach to estimate market risk

True

As compared to the BIS standardized framework model for measuring market risk, the internal models allowed by the large banks are subject ot audit by the regulators

True

As secularization of assets continues to expand, the management of market risk will become more important to FIs

True

Assets and liabilities that are expected to require extensive time to liquidate are normally placed in the investment portfolio

True

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets

True

In the BIS standardized framework model, the general market risk weights reflect the product of the modified durations and interest rate shocks

True

In the BIS standardized framework model, the specific risk charge attempts to measure the decline in the liquidity or credit risk quality of the trading portfolio over the holding period.

True

Market risk is the uncertainty of an FI's earnings resulting from changes in market conditions such as interest rates and asset prices

True

Market risk management is important as a source of information on risk exposure for senior management

True

Monte-Carlo simulation is a proicess of creating asset returns based on actual trading days so that the probabilities of occurrence are consistent with recent historical experience.

True

One of the reasons for the development of internal risk measurement models is the proposal of the BIS to impose captial requirements on the trading portfolios of FIs

True

Price volatility is the price sensitivity times the potential adverse move in yield.

True

Price volatility of a bond can be estimated by multiplying the bond's modified duration by the adverse daily yield move.

True

The JPM RiskMetrics model generally prefers using present value of cash flow changes as the price sensitivity weights.

True

The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history

True

The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.

True

The major traders of MBS prior to the recent financial crisis were investment banks and securities firms

True

The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods

is the investment portfolio