1、1. To convert VaR from a one day holding period to a ten day holding period the VaR number is generally multiplied by:Explanation :VaR(T days)= VaR(1 day)*(T)1/2 VaR(10 days)= VaR(1 day)*(10)1/22. Which of the following methodologies of risk contribution for economic capital allocation assumes that
2、the economic capital should be allocated exactly to the same extent of the amount released as in case when the business unit is sold or added?Incremental EC contributionsExplanation :Considering everything else to be the same, incremental EC contribution method assumes that the EC should be allocate
3、d exactly to the same extent of the amount released as in case when the business unit is sold or added. This method is also called the discrete marginal EC allocation method.3. With reference to Principles for sound stress testing practices and supervision, which of the following statements is false
4、?The infrastructure need not be flexible.(True: A bank should have suitably flexible infrastructure as well as data of appropriate quality and granularity. The infrastructure should enable the bank on a timely basis to aggregate its exposures to a given risk factor to apply new scenarios as needed.
5、System flexibility is crucial to handle customized and changing stress tests.)Explanation :The infrastructure should also be sufficiently flexible to allow for targeted or ad-hoc stress tests at the business line or firm-wide level to assess specific risks in times of stress.4. Which of the followin
6、g regarding market risk management in non-financial firms is INCORRECT?Market risk management in non-financial firms has very strict guidelines and regulations.(Correct: Non-financial firms take on market risks in the natural course of their business without seeking such risks to derive profit. Most
7、 manufactures are exposed to foreign currency fluctuations. Non-financial firms consider market risk as externalities about which they can do little.)Explanation :Market risk management in non-financial have very few guidelines and no regulations comparable to those in banking or fund management.5.
8、For which of the following is Extreme Value Theory (EVT) best suited?Measuring 100-years floodsExplanation :The statistical measure dealing with extreme deviations from the median of probability is termed as EVT. It is used in numerous fields where the applications require the assessment of catastro
9、phic events as diverse as reliability, reinsurance, hydrology, and environmental sciences. It mainly assesses risk for highly unusual events. For example, it helps in measuring 100-year floods, etc.6. Which of the following best describes market risk?Market risk is the potential loss an institution
10、faces from adverse movements in the level or volatility of market prices including interest rates, foreign exchange rates, equity prices and commodity prices.Explanation :Market risk is the potential loss an institution faces from adverse movements in the level or volatility of market prices includi
11、ng interest rates, foreign exchange rates, equity prices and commodity prices. All other options partially define market risk.7. Which of the following approaches to stress testing provides a distinct confidence level to the risk manager regarding risk exposure of a given portfolio?Algorithmic scena
12、rio approachExplanation :With historical and hypothetical stress scenarios, the risk manager is not in a position to have a distinct confidence level to make it a point that there is cent percent risk exposure of a given portfolio. This makes a room for a more systematic approach, like algorithmic s
13、cenario approach, which can provide with more confidence.8. With reference to using EVT as a stress testing method, on which of the following, the Block Maxima Approach is based?Large observations based on large samples of identically distributed observationsExplanation :Block Maxima Approach is bas
14、ed on the largest observations collected from large samples of identically distributed observations.9. Bank ANZ owns a portfolio of options on the USD/GBP exchange rate. The delta equivalent position of the portfolio is GBP 56.00. The current exchange rate is 1.5, with a daily volatility of 0.7 perc
15、ent. Using the given information and assuming that changes in portfolio value are normally distributed, the 99 percent /10-day VaR for this portfolio is:(Note: Daily VaR = Daily Volatility * Delta Equivalent Position * Exchange Rate)Explanation :10. From the following information, calculate the tota
16、l risk-weighted assets, as per Basel II capital requirements.Credit risk-weighted assets = $50 millionMarket risk capital = $5 million Operational risk capital = $2 millionExplanation :Total risk-weighted assets = Credit risk-weighted assets + 12.5 x (Market risk capital + Operational risk capital)=
17、 $50 million + 12.5 x ($5 million + $2 million)= $50 million + $87.5 million= $137.5 million11. A risk manager would like to measure VaR for a bond. He notices that the bond has a putable feature. What affect on the VaR will this putable feature have?The VaR will decreaseExplanation :The puttable fe
18、ature of a bond reduces the VaR figure of the portfolio if the portfolio is having a long position in the bond.12. Portfolio A has a 1-day, 95% VaR of $5 million. Portfolio B has a 1-day, 95% VaR of $7 million. Is it possible for the 1-day, 95% VaR of the combined portfolio (A+B) to be greater than
19、$12 million.Yes, but only if the tails of the loss distribution for A and B are not monotonically decreasing.Explanation :This is possble, but unusual. It does remind us that we usually need the whole distribution and not just a single point to aggregate VaRs.13. Which of the following best describe
20、s capital allocation?A method that shows how capital is distributed to business units based on usage of risk capital.Explanation :Capital allocation methods refer to risk capital and show how actual capital can be allocated to business units based on usage of risk capital. Capital allocation involve
21、s relating risk capital to the banks actual capital.14. The ratio of the default probability of an AA-rated issuer over the default probability of a B-rated issuer:Generally increases with time to maturity Explanation :The probability is low for AA credit for short maturities but increases more, rel
22、ative to the starting value, than for lower credits.15. Which of the following is Moodys lowest investment grade credit rating?Explanation :Baa3 is the lowest rating.16. Consider two bonds, one AA rated and the other B rated. Which of the following is true?The marginal default rate of the B rated bo
23、nd declines over a long time period (say 10 years) compared with the AA rated bond(false: The marginal default rate of the B rated bond increases over a long time period (say 10 years) compared with the AA rated bond, The marginal rates of default stay roughly the same over all time scales, The rati
24、o of marginal default rate between the two bonds stays constant at all times)Explanation :Decline in the marginal default rate can take a long time for low-rated bonds, especially relative to higher-rated ones.17. A 10-year U.S.Treasury strip has a yield of 6% and a 10-year zero issued by XYZ Inc, r
25、ated A by S&P and Moodys, has 7% (semi-annual compounding). Assuming a recovery rate of 45% What is the cumulative probability of XYZ Inc, defaulting during next 10 years?Explanation :In this case we are calculating cumulative probability of default using market prices. We will use the following equ
26、ation: (1+y)=(1+y*)1-Pi(1-f) pi is the cumulative probability of default y = 6%y*=7% f=45%Period, 10 years, compounded semiannually. By using this equation we find that: Pi(1-f) = 1 - (1 + y)20 / (1 + y*)20)or Pi(1 - f) = 0.0923 or Pi = 9.23%/(1 - 45%)or Pi = 16.8%18. What is the difference between
27、the marginal default probability and the cumulative default probability?I. Marginal default probability is the probability that a borrower will default in any given year, while the cumulative default probability is over a specified multi-year period. II. Marginal default probability is the probabili
28、ty that a borrower will default due to a particular credit event, while the cumulative default probability is for all possible credit eventsIII. Marginal default probability is the minimum probability that a borrower will default, while the cumulative default probability is the maximum probabilityOn
29、ly IExplanation :The marginal default rate is the probability of defaulting over the next year, conditional on having survived to the beginning of the year.19. Which one of the following statements about contract netting is NOT correct?Netting provides for effective reduction in credit exposures bec
30、ause of the certainty provided by contract law throughout the world.(correct: By reducing the number and overall value of payments between financial institutions, netting can enhance the efficiency of national payment systems and reduce settlement costs associated with the large and growing volume o
31、f foreign exchange transactions. Netting can also contribute to an increase in systemic risk if, instead of achieving reductions in participants true exposures, it merely obscures the level of exposures. Netting can reduce the size of credit and liquidity exposures incurred by market participants an
32、d, thereby, contribute to the containment of systemic risk.)Explanation :First three are correct. Fourth option is not correct because all netting arrangements throughout the world are not legally binding.20. Based on historical evidence from S&P, a B rated counterparty is approximately 16 times mor
33、e likely to default over a 1-year time period than a BBB rated counterparty. Over a 10-year time period, a B rated counterparty is how many times more likely to default than a BBB rated counterparty? Between 4 and 15Explanation :The ratio at 10-year horizon is 42.88/5.23=8.19. Intuitively, the defau
34、lt rate on B credits should increase at lower rate than that on BBB credits. The cumulative default rate on B credits starts with a high value but cannot go above 1.21. Limited only to the following information, according to the Altman Z-score model, which of the following counterparties would have
35、the least credit risk?A counterparty with earnings before interest and taxes (EBIT/Total assets ) value of 0.6 and a retain earnings/Total assets value of 0.4Explanation :As the EBIT /Total assets and the retaining earnings /Total assets are higher the counterparties will have the least credit risk.
36、22. Which one of the following statements about credit risk from derivatives instruments is NOT correct?Credit exposures should always be computed net of risk-reducing features such as master netting agreements and collateral or third party guarantees.(correct: If credit limits are exceeded, excepti
37、ons should be resolved according to the institutions policies and procedures. Credit limits that consider both settlement and pre-settlement exposures should be established for all counterparties with whom the institution conducts business. Prior to settlement, credit risk is measured as the sum of
38、the replacement cost of the position plus an estimate of the institutions potential future exposure from the instrument as a result of market changes)Explanation :Conservative estimates of credit risk take into account gross exposures and take into account the credit risk of collateral assets or gua
39、rantees23. According to S&Ps, the 5-year cumulative probability of default for AA-rated debt is 25%. If the marginal probability of default for AA debt from year 5 to year 6 (conditional on no prior default) is 15%, then what is the 6-year cumulative probability default for AA-rated debt?Explanation
40、 :Under the assumed conditions, the cumulative 6-year default rate would be:C6(R) = C5(R) + k6 or C6(R) = C5(R) + (S5 * d6).In our case, C5(R) = 25%, S5 = (1-25%) and d6 = 0.15So, we can calculate C6(R), i.e., Cumulative Probability.C6(R)=0.25 + (0.75 * 0.15)C6(R)=0.25 + 0.1125C6(R)= 0.3625 or 36.25
41、%24. A portfolio consists of one (long) 100 million asset and a default protection contract on this asset. The probability of default over the next year is 10% for the asset, 20% for the counterparty that wrote the default protection. The joint probability of default for the asset and the contract c
42、ounterparty is 3%. Estimate the expected loss on this portfolio due to credit defaults over the next year assuming 40% recovery rate on the asset and 0% recovery rate for the contract counterparty.Explanation :You face a loss only if both asset and counterparty default, a probability of 3% and you r
43、ecover 40% of the value in this case, so the expexted net loss is: 100*0.03*(1-0.4)=1.8 million25. The following is a simplified transition matrix for four states:Calculate the cumulative probability of default in year 2 if the initial rating in year 0 is B.Explanation :The company could default in
44、year 2 with a total probability of:P(D2 A1)P(A1) + P(D2 B1)P(B1) + P(D2 C1)P(C1)=0*0.02+0.03*0.93+0.23*0.02=3.25%=3.25%+3%=6.25%26. To reduce credit risk, a company can:Expose themselves to many different counterpartiesTake on a variety of positionsSet up netting agreements with all of their approve
45、d trading partnersExplanation :Credit risk will be decreased with netting, more positions and counterparties.27. Which one of the following is not a key risk indicator of operational risk?Systematic risk in the financial markets(key indicator: Audit scores, Staff turnover, Trade volumes)Explanation
46、:Audit scores, Staff turnover, Trade volumes and so on can be used as key indicators. These indicators provide more sophisticated measurement tools, which consist of a simple indication of whether the risks are changing over time.28. Which of the following statements correctly describes the properti
47、es of operational risk management tools?Causal networks utilize conditional probabilitiesExplanation :Key risk indicators are objective not subjective measures. Actuarial models require either a top down or a bottom up methodology. Earnings volatility models do not adjust automatically for macro eco
48、nomic risks. Causal networks do utilize conditional probabilities.29. Which of the following components of the risk information management environment helps define data semantics?MetadataExplanation :Its the metadata that helps define semantics. For example, “facility” can be interpreted differently
49、 in the trading book and the loan book.30. Which of the following statement is false regarding risk models?Risk models are not used to mitigate the operational risk.(True: The dangers of model risk exist that include sources such as misspecification, misapplication and incorrect implementation. Quantitative models are used for valuing complex derivatives. Quantitative models are used to calculate the market and credit risk of these derivatives.)Explanation :Models have also been used to measure and mitigate operational risk such as credit card fraud, apprehending terrorist f
