Chapter 15- Market Risk
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. 42. What is the day VAR? 43. What is the 20-day VAR?
42. 15,811 43. 22,361
39. Providing senior management with information on the risk exposure taken by FI traders is considered to be which of the following reasons for the importance of MRM? A. Regulation B. Resource allocation C. Management information D. Setting limits
C
10. Market value at risk (VAR) is defined as the daily earnings at risk (DEAR) times the number of days (N).
F
13. In estimating price sensitivity, the JPM model prefers to use modified duration over the present value of cash flow changes.
F
16. If the stock portfolio replicates the stock market index portfolio, the beta of the portfolio should be less than 1.0.
F
19. The long hand method used to estimate the foreign exchange exposure of a bank's trading portfolio takes into account the correlation among the different currencies.
F
20. The JPM RiskMetrics model is based on the assumption of a binomial distribution of asset returns.
F
21. The back simulation approach to estimating market risk exposure requires normally distributed asset returns, but does not require correlations of asset returns.
F
23. One advantage of RiskMetrics over back simulation is that RiskMetrics provides a worst- case scenario value.
F
28. Banks in the countries that are members of the BIS must use the standardized framework to measure market risk exposures.
F
34. 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.
F
35. In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for each maturity.
F
36. In the BIS framework, horizontal offsets within time zones are used to adjust residual positions between zones.
F
37. In the early 2000s the market risk capital requirement uniformly was a large proportion of the total risk capital requirements for the largest US banks.
F
6. Considering the market risk of traders' portfolios for the purpose of establishing restrictions on positions per trader in each area of trading is resource allocation.
F
7. Comparing returns to market risks in different areas of trading for the purpose of identifying those areas with the greatest profit potential into which more capital can be directed is performance evaluation.
F
8. Market risk is the potential gain caused by an adverse movement in market conditions.
F
9. Daily earnings at risk is defined as the dollar value of a position times price sensitivity.
F
38. The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods is
IN THE INVESTMENT PORTFOLIO
11. Price volatility is the price sensitivity times the potential adverse move in yield.
T
12. Price volatility of a bond can be estimated by multiplying the bond's modified duration by the adverse daily yield move.
T
14. In a well-diversified portfolio, unsystematic risk can be largely diversified away.
T
15. Market risk is often considered to be undiversifiable in the risk analysis of equities.
T
17. Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.
T
18. The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.
T
22. The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history.
T
24. A disadvantage of the back simulation approach to estimate market risk exposure is the limited confidence level based on the number of observations.
T
25. A problem with using more observations in the back simulation approach is that more distant observations have less relevance in predicting VAR estimates of the future.
T
26. Monte-Carlo simulation is a process of creating asset returns based on actual trading days so that the probabilities of occurrence are consistent with recent historical experience.
T
27. One of the reasons for the development of internal risk measurement models is due to the proposal of the BIS to impose capital requirements on the trading portfolios of FIs.
T
29. 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.
T
30. In the BIS standardized framework model, the general market risk weights reflect the product of the modified durations and interest rate shocks.
T
31. In the BIS standardized framework model, vertical offsets are disallowance factors caused by basis risk between the returns of different types of assets.
T
32. The capital requirements of the internally generated market risk exposure estimates can be met with three types of capital.
T
33. As compared to the BIS standardized framework model for measuring market risk, the internal models allowed by the large banks are subject to audit by the regulators.
T
4. Assets, liabilities, and derivative contracts that are considered to require extensive time to liquidate normally are placed in the investment portfolio.
T
5. Market risk management is important as a source of information on risk exposure for senior management.
T
41. A reason for the use of 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. Setting limits E. Perf evaluation
a
47. 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 yield move. D. the price volatility times the ÖN. E. more than one of the above is correct.
a
67. The general market risk charge in the BIS standardized framework of market risk measurement A. reflects the product of the modified durations and the interest rate shocks. B. measures the credit risk quality of the trading portfolio. C. measures the vertical offsets of the portfolio. D. measures the decline in liquidity of the portfolio. E. More than one of the above is correct.
a
40. Using MRM to identify the potential return per unit of risk in different areas by comparing returns to market risk in the areas is considered to be which of the following? A. Regulation B. Resource allocation C. Management information D. Setting limits E. Performance evaluation
b
46. 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 volatility times the ÖN. E. more than one of the above is correct.
b
62. 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 estimates. C. Asset returns do not need to be normally distributed. D. The correlation matrix does not need to be calculated. E. A worst-case scenario value is determined by back simulation.
b
44. 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 above.
e
45. In calculating the VAR of fixed-income securities, 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 changes are assumed to be normally distributed. D. all of the above are correct. E. b and c are correct.
e
48. 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 move. D. the price volatility times the ÖN. E. DEAR times the ÖN.
e
66. The specific risk charge in the BIS standardized framework of market risk measurement A. reflects the product of the modified durations and the interest rate shocks. B. measures the credit risk quality of the trading portfolio. C. measures the vertical offsets of the portfolio. D. measures the decline in liquidity of the portfolio. E. More than one of the above is correct.
e
1. Market risk is the uncertainty of an FI's earnings resulting from changes in market conditions such as interest rates and asset prices.
t
2. Regulators usually view tradable assets as those held for horizons of less than one year.
t
3. An FI's trading portfolio can be differentiated from its investment portfolio by liquidity and time horizon.
t
The additional capital charge for basis risk measures the ------- of the portfolio.
vertical offsets
