StuDocu is not sponsored or endorsed by any college or university CH9 (Testbank) - notes Bank Management (Western Sydney University) Downloaded by Hoan My Phan (
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Chapter 09 - Testbank Student: ___________________________________________________________________________ 1. 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. 2. 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. 3. Which of the following statements is true? A. Since regulators are concerned with the social cost of a failure, regulatory models will normally tend to be more conservative than private sector models that are concerned only with the private costs of failure. B. Since regulators are concerned with the social cost of a failure, regulatory models will normally tend to be less conservative than private sector models that are concerned only with the private costs of failure. C. Regulators and private firms are both concerned with the social cost of a failure and thus their models do not differ. D. None of the listed options are correct. 4. 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. 5. 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). Downloaded by Hoan My Phan (
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6. Which of the following statements is true? A. Daily price volatility is calculated as the price sensitivity to a small change in yield multiplied by the adverse daily yield move. B. Daily price volatility is calculated as the negative modified duration of a security multiplied by the adverse daily yield move. C. The daily price volatility of a security influences how much an FI might lose in case of adverse market movements. D. All of the listed options are correct. 7. Which of the following statements is true? A. The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes. B. The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes. C. The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes. D. Assumptions regarding the distribution of yields are not significant in market risk measurement models. 8. 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. 2.45 0.00165 = 0.40%. B. –2.45 0.00165 = –0.40%. C. 2.45 0.0165 = 4.04%. D. –2.45 0.0165 = –4.04%. 9. 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. 10. Assume the market value of a position is $100 000 and that its modified duration is 3.30 years. Further assume that the potential adverse move in yield is 16.5 basis points. What are the daily earnings at risk for this position (round to two decimals)? A. $54.45 B. $544.50 C. $54 450.00 D. Not enough information to solve the question. 11. 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. Downloaded by Hoan My Phan (
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12. Which of the following statements is true? A. DEAR acknowledges that an FI can sell all its bonds tomorrow, as markets are entirely liquid. B. DEAR assumes that an FI cannot sell all its bonds tomorrow, although in reality this might be possible. C. DEAR assumes that an FI can sell all its bonds tomorrow, although in reality it might take many days for the FI to unload its position. D. DEAR acknowledges that an FI cannot sell all its bonds tomorrow, but that instead it might take many days for the FI to unload its position. 13. 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)? A. $5000 10 = $15 811.39 B. $5000 (10 – 1) = $15 000.00 C. $5000 10 = $707.11 D. $5000 (10 – 1) = $636.40 14. Assume the dollar market value of an FI's position is $200 000 and the calculated price volatility is 1.25 per cent. What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)? A. $2 683.28 B. $6 123.72 C. $200 000.00 D. $489 897.95 15. Assume the dollar market value of an FI's position is $200 000 with a modified duration of 4 years. The potential adverse move in the yield is 16.5 basis points. What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)? A. $1 320.00 B. $3 233.33 C. $330.00 D. $200 000.00 16. Which of the following statements is true? A. The relative illiquidity of a market reduces an FI's losses. B. The relative illiquidity of a market exposes an FI to magnified losses. C. The relative illiquidity of a market does not influence an FI's loss size. D. None of the listed options are correct. 17. 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? A. $2 000 000 0.03 = $60 000 B. $2 000 000 1.0 0.03 = $60 000 C. $2 000 000 1.65 0.03 = $99 000 D. $2 000 000 2.33 0.03 = $139 800 Downloaded by Hoan My Phan (
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