Ch.15 Test Bank Docx Market Risk - Financial Institutions 10e Complete Test Bank by Anthony Saunders. DOCX document preview.
Chapter 15 Market Risk
KEY
1. Market risk is the uncertainty of an FI's earnings resulting from changes in market conditions such as interest rates and asset prices.
2. As securitization of assets continues to expand, the management of market risk will become more important to FIs.
3. Income from trading activities of FIs is less important today than the traditional activities of banks.
4. Assets and liabilities that are expected to require extensive time to liquidate are normally placed in the investment portfolio.
5. Regulators include market risk of an institution when determining the required level of capital an FI must hold.
6. Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by mid-2009.
7. The major traders of mortgage-backed securities prior to the recent financial crisis were investment banks and securities firms.
8. Although financial markets deteriorated during the summer of 2009, by September of that year the banking system had returned to normal operation.
9. Market risk management is important as a source of information on risk exposure for senior management of an FI.
10. 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.
11. If a trader in charge of an investment portfolio of an FI generates returns that are higher than other traders at the FI, she should be rewarded with higher compensation.
12. The Volcker Rule is intended to reduce market risk at depository institutions.
13. The Volcker Rule allows U.S. depository institutions to invest in hedge funds and private equity funds in order to gain more diversification of the trading portfolio.
14. Depository institutions are prohibited from proprietary trading by the Volcker Rule.
15. The Volcker Rule became effective in early 2013.
16. The Volcker Rule reduces the specialness of banks in maturity intermediation by effectively forcing DIs to hold a matched maturity book.
17. Market risk is the potential gain or loss caused by an adverse movement in market conditions.
18. Banks are limited by regulation to using the historic or back simulation method to quantify market risk exposure.
19. Daily earnings at risk (DEAR) is defined as the dollar value of a position times price sensitivity of that position.
20. The N-day Market value at risk (VAR) is defined as the daily earnings at risk (DEAR) times the number of days (N).
21. Price volatility is the price sensitivity of a trading position times the potential adverse move in yield.
22. Daily price volatility of a bond can be estimated by multiplying the bond's modified duration by the adverse daily yield move.
23. In estimating price sensitivity, the RiskMetrics model prefers to use modified duration over the present value of cash flow changes.
24. The RiskMetrics model generally prefers using the present value of cash flow changes as the price-sensitivity weights.
25. Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.
26. The DEAR of a portfolio of assets is simply the weighted average of each individual assets' DEAR.
27. The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.
28. The JPM RiskMetrics model is based on the assumption of a binomial distribution of asset returns.
29. A major weakness of the RiskMetrics Model is the need to assume a symmetric or normal distribution of asset returns.
30. The back simulation approach to estimating market risk exposure requires normally distributed asset returns, but does not require correlations of asset returns.
31. The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history.
32. One advantage of RiskMetrics over back simulation approach to measure market risk is that RiskMetrics provides a worst case scenario number.
33. A disadvantage of the back simulation approach to estimate market risk exposure is the limited confidence level based on the number of observations.
34. 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.
35. Monte-Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security's value.
36. The Value at Risk (VAR) provides information about the potential size of the expected loss given a level of probability.
37. The Expected Shortfall (ES) is a measure of market risk that estimates the expected losses beyond a given confidence level.
38. For situations in which probability distributions exhibit fat tail losses, expected shortfall (ES) may look relatively small, but value at risk (VAR) may be very large.
39. The Bank for International Settlements (BIS) is an organization formed by the largest commercial banks operating in developed markets.
40. One of the reasons FIs develop internal market risk measurement models is the proposal of the BIS to impose capital requirements on the trading portfolios of FIs.
41. Banks in the countries that are members of the BIS must use the standardized framework to measure market risk exposures.
42. 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.
44. A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the general market risk capital requirement charge in the BIS framework.
45. In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for the maturity of each trading position.
46. Basel III proposes the partial risk factor approach to measuring capital that must be kept against a trading book as a revised standardized approach that FIs may use rather than internal models to measure market risk.
47. The partial risk factor approach incorporates the return correlations between assets held in the trading portfolio.
48. When using the BIS standardized model (partial risk factor approach) to determine capital requirements of the trading book, correlations for equity risk are set by the Federal Reserve.
49. Equity trading risk weights of the BIS standardized approach vary between emerging markets and developed markets.
50. Equity trading risk weights of the BIS standardized approach vary based on the industry of the stock being held and traded.
51. In the early 2000s the market risk capital requirement was a large proportion of the total risk capital requirements for the largest US banks.
52. Economic-value stress testing is intended to capture the firm’s exposure to unlikely but plausible events in abnormal markets.
53. Nonstatistical risk measures provide granular information on the firm’s market risk exposure by looking at sensitivities to variables like credit spread, interest rate basis point values, and market values.
54. Beta represents the systematic risk reflecting the co-movement of the returns on a specific stock with the returns of another stock.
55. The Monte Carlo simulation is a tool for considering portfolio valuation under all possible combinations of factors that determine a security’s value.
56. The Sensitivities-Based Method (SBM) suggests that banks use analysis of “sensitivities” to estimate risk charges against beta risks.
57. The Default Risk Charge (DRC) is intended to capture jump-to-default risk and is calibrated to the credit risk treatment in the banking book to reduce potential discrepancy in capital requirements for similar risk exposures across the banking and trading books.
58. Which of the following are included in the methodological approach to calculate the VAR?
A. measure exposures
B. measure sensitivity
C. measure risk
D. rank days by risk from worst to best
E. all of the above are included in the methodological approach
59. 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.
60. 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.
61. 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.
62. 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. Default risk.
63. 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 risk.
E. cannot be differentiated on the basis of time horizon and liquidity.
64. 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 assets and liabilities denominated in nondomestic currencies.
D. The cost incurred by an FI when its technological investments do not produce anticipated cost savings.
E. The capital required to offset a sudden decline in the value of its assets.
65. 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.
66. 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. setting limits.
E. performance evaluation.
67. 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 following?
A. Regulation.
B. Resource allocation.
C. Management information.
D. Setting limits.
E. Performance evaluation.
68. 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. Setting limits.
E. Performance evaluation.
69. 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.
70. 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 changes are assumed to be normally distributed.
D. All of the options.
E. 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.
71. 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 √N.
E. More than one of the above is correct.
72. 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 yield move.
D. the price volatility times the √N.
E. None of the options.
73. 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 move.
D. the price volatility times the √N.
E. DEAR times the √N.
74. 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.
75. 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 symmetric (normal) distribution for all asset returns.
D. Requirement for calculating the correlations of asset returns.
E. Calculations become highly complex; need to assume a symmetric (normal) distribution for all asset returns.
76. 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 risk is the sum of systematic risk and unsystematic risk.
D. Systematic risk reflects the co-movement of a stock with the market portfolio.
E. Unsystematic risk is specific to the firm.
77. 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.
78. 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.
79. 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, common stock, and long-term subordinated debt.
E. only with short- or long-term subordinated debt.
80. 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.
81. 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 positions is known.
D. there is a high degree of confidence when using small sample sizes.
E. None of the options.
82. 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 returns used in the model may not be relevant to the current market returns.
D. it accounts for non-standard return distributions.
E. None of the options.
83. 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 contribute a larger amount to the model.
C. Decrease the number of assets in the trading portfolio so that past returns will provide more accuracy to the model.
D. Increase the number of assets in the trading portfolio in order to benefit from higher levels of diversification.
E. The weaknesses in the model cannot be overcome.
84. 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. All of the options.
85. 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 probability distribution is skewed to the right.
D. a continuous probability distribution cannot be constructed.
E. The probability distribution indicates there is a possibility of a "fat tail" loss.
86. 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 the left.
C. That changes in asset prices are normally distributed but with fat tails.
D. That the probability distribution is skewed to the right.
E. That changes in asset prices follow a standard normal probability distribution.
87. 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 the correct scaling factor.
88. 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 addition the bank has sold short 1,500 shares of the Japanese technology firm Sony at a price of $32.00 and 750 shares of McDonald’s Corp. What is the amount of capital that MMC Bank is required to keep against this portfolio according to the Basel Standardized approach?
A. $135,360.52
B. $98,373.59
C. $36,987.33
D. $116,044.60
E. $102,843.33
Feedback:
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 ρij is the correlation parameter between equities i and j.
Equity Risk Capital:
where and γbc is the correlation parameter between buckets b and c.
Buckets and Risk Weights:
McDonald’s and Duke Energy are risk bucket (b) #5, a risk weight (RW) of 30 percent, are both long positions so a correlation parameter of 20 percent.
UBS and Sony are risk bucket (b) #8, a risk weight (RW) of 50 percent, one is long one is short so the correlation parameter is 20 percent.
K5 = [(0.30)2({2,750-750} ×$97.50)2 + (0.30)2(3,500×$65.00)2 +
2(0.20)(0.30)({2,750-750}×$97.50)(0.30)(3,500×$65.00)]1/2 = $98,373.59
K8 = [(0.50)2(1,000×$47.50)2 + (0.50)2(1,500×$32.00)2 +
2(0.20)(0.50)(1,000×$47.50)(0.50)(1,500×$32.00)]1/2 = $36,987.33
Equity Risk Capital
Cross correlation between buckets 5 and 8 is 20 percent.
ERC ={ [($98,373.59)2 + (36,987.33)2 ] + 2(0.20)[(0.30)(2,000×$97.50) + (0.30)(3,500×$65.00)] [(0.50)(1,000×$47.50) + (0.50)(1,500×$32.00)]}1/2 = $116,044.60
89. 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 a price of $65.00; short 1,000 shares of Credit Suisse at a price of $35.75; and short of 500 shares of Intel. What is the amount of capital that Cornbelt is required to keep against this portfolio according to the Basel Standardized approach?
A. $107,580.01
B. $118,211.98
C. $141,994.41
D. $99,774.75
E. $42,218.74
Feedback:
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 ρij is the correlation parameter between equities i and j.
Equity Risk Capital:
where and γbc is the correlation parameter between buckets b and c.
Buckets and Risk Weights:
Rio Tinto and Exxon/Mobile are risk bucket (b) #7, a risk weight (RW) of 40 percent, are both long positions so a correlation parameter of 35 percent.
Intel and Credit Suisse are risk bucket (b) #8, a risk weight (RW) of 50 percent, one is long one is short so the correlation parameter is 20 percent.
K7 = [(0.40)2(1,250 ×$40.00)2 + (0.40)2(3,500×$65.00)2 +
2(0.35)(0.40)(1,250×$40.00)(0.40)(3,500×$65.00)]1/2 = $99,774.75
K8 = [(0.50)2({2,500-500}×$32.50)2 + (0.50)2(1,000×$35.75)2 +
2(0.20)(0.50)({2,500-500}×$32.50)(0.50)(1,000×$35.75)]1/2 = $42,218.74
Equity Risk Capital
Cross correlation between buckets 7 and 8 is 20 percent.
ERC ={ [($99,774.75)2 + ($42,218.74)2 ] + 2(0.20)[(0.40)(1,250×$40.00) + (0.40)(3,500×$65.00)] [(0.50)(2,000×$32.50) + (0.50)(1,000×$35.75)]}1/2 = $118,211.98
90. 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.
Feedback: 
91. 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.
Feedback: 
92. 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 (one-tailed) limit is used?
A. 3.30%.
B. 20.0%.
C. 33.0%.
D. 39.2%.
E. 46.6%.
Feedback: 90% confidence interval (5% under each tail) is (0 ± 1.65 × σ)
Maximum yield change expected (potential adverse move) = (0 ± 1.65 × 0.20) = 0 ±0.33
93. 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 (one-tailed) limit is used?
A. 3.30%.
B. 20.0%.
C. 33.0%.
D. 39.2%.
E. 46.6%.
Feedback: 95% confidence interval (2.5% under each tail) is (0 ± 1.96 × σ)
Maximum yield change expected (potential adverse move) = (0 ± 1.96 × 0.20) = 0 ±0.392
94. 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 (one-tailed) limit is used?
A. 3.30%.
B. 20.0%.
C. 33.0%.
D. 39.2%.
E. 46.6%.
Feedback: 99% confidence interval (½ % under each tail) is (0 ± 2.33 × σ)
Maximum yield change expected (potential adverse move) = (0 ± 2.33 × 0.20) = 0 ±0.466
95. 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.
Feedback: Zero coupon bonds have a duration that is equal to its maturity.
MD = D/(1 + R) = 6/(1.10) = 5.4545
96. 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 percent.
B. -2.00 percent.
C. -2.18 percent.
D. -1.09 percent.
E. -1.20 percent.
Feedback: Price volatility = (MD) × (potential adverse move in yield)
PV = (5.4545 × −0.0020) = −0.0109
97. 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.
E. -$225,789.
Feedback: DEAR = (dollar value of position) × (price volatility)
DEAR = ($20,000,000) × (5.4545 × −0.0020) = −$218,180
98. 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. -$389,135.09
D. -$428,405.58
E. -$471,246.16
Feedback:
99. 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?
A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Feedback: DEAR = (−$150,000 − $250,000) = −$400,000
100. 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 1.0?
A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Feedback: Presented in $1,000
101. 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?
A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Feedback: Presented in $1,000
102. 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 0.0?
A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Feedback: Presented in $1,000
103. 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 -1.0?
A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Feedback: 
104. 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?
A. -$100,000.
B. -$316,228.
C. -$1,106,797.
D. -$1,204,161.
E. -$1,264,911.
Feedback: 
105. On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf1.89/$.
What were the respective positions of the two currencies in dollars?
A. $2,173,913 and $94,500,000.
B. $18,400,000,000 and $26,455,026.
C. $2,173,913 and $26,455,026.
D. $18,400,000,000 and $94,500,000.
E. None of the options.
Feedback: Yen: ¥200,000,000 × (1/(¥92/$)) = ¥200,000,000 × $.010869565/¥ = $2,173,913
Swf: 50,000,000 × (1/(1.89Swf/$)) = 50,000,000 × $0.52910 = $26,455,026
106. On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf1.89/$.
What is the value of delta for the respective positions of the two currencies in dollars?
A. -$200,000,000 and -$50,000,000.
B. -$21,524 and -$261,930.
C. -$21,524 and -$50,000,000.
D. -$200,000,000 and -$261,640.
E. -$21,524 and -$317,642.
Feedback: Delta measures the change in the dollar value of each FX position if the foreign currency depreciates by 1 percent against the dollar.
107. On December 31, 2015 Historic Bank had long positions of 200,000,000 Japanese Yen and 50,000,000 Swiss Francs. The closing exchange rates were ¥92/$ and Swf1.89/$.
Over the past 500 days, the 25th worst day for adverse exchange rate changes saw a change 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?
A. -$96,332.
B. -$2,157,088.
C. -$26,375,899.
D. -$109,233.
E. -$314,848.
Feedback:
108. 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):
What are the expected returns for securities Alpha and Beta, respectively (in millions)?
A. −$248 and +$248
B. +$248 and +$248
C. −$300 and +$400
D. +$300 and −$3,300
E. none of the options
Feedback: 
109. 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):
What is the one-day, 99% confidence level, value at risk (VAR) of securities Alpha and Beta, respectively (in millions)?
A. $3 and $25.50
B. $3 and $0.75
C. $248 and 248
D. $300 and $300
E. 300 and 3,300
Feedback: Recall that the DEAR and particularly VAR is a point on the probability distribution and do not take into account values beyond that point. In this case, the 99 percent level.
Alpha:
Beta: 
110. 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):
What is the expected shortfall (ES) of securities Alpha and Beta at the 99 percent confidence level, respectively (in millions)?
A. −$300 and −$3,300
B. −$3 and −$24.75
C. −$3 and −$25.50
D. −$300 and −$300
E. −$ and −$0.75.
Feedback: For 99% confidence level, include all values in left tail of distribution until probability is equivalent to one (1):
ESAlpha = 0.01 × −300 = −$3
ESBeta = (0.0025 × −300) + (0.0075 × −3,300) = −0.75 − 24.75 = −$25.50
111. 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):
Based on your answers to the previous three question, which of the following is true?
A. Security Alpha represents the riskier of the two assets in the trading portfolio because there is a one-percent probability of loss the following day.
B. Both securities have the same expected payoff; therefore, it makes no difference which is in the trading portfolio.
C. Security Beta is the better asset to have in the trading portfolio since there is a 50 percent probability of a $400 payoff versus only $355 with security Alpha.
D. Both securities have the same expected payoff and value at risk (VAR), therefore it makes no difference which is in the trading portfolio.
E. According to the expected shortfall measure, if tomorrow is a bad trading day, losses will exceed $25 million.
112. 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):
What is the expected payoff, the 99% value at risk (VAR) and the expected shortfall (ES) of security Gamma (in millions)?
A. +$248; −$2,000; −$2000
B. −$248; −$20; −$2,000
C. −$2.150; −$2,150; −$2,150
D. +$248; −$21.50; −$20.00
E. ±$0.00; −248; −$2,150
Feedback: Gamma Expected Return:
Gamma 1-day, 99% VAR:
Recall that VAR is a point on the probability distribution and do not take into account values beyond that point; in this case, the 99 percent level.
VAR99% = −$2,000
Gamma estimated shortfall at 1% level:
At the one-percent level, the estimated shortfall is equal to the VAR:
For 99% confidence level, include all values in left tail of distribution until probability is equivalent to one (1):
ESGamma = 0.01 × −2,000 = −$2,000