Functions of Financial Markets *

What is NOT a function of financial markets?

to channel funds
to fund deficits
to offer opportunites for savers
to offer gambling opportunities
to offer improved asset prices
Struture of Financial Markets *
What is NOT a way we can subdivide a financial market?
by asset
by location
by maturity
by participants
by philosophy
Debt Markets *
Interest payable on debt must cover
the possiblity of extreme weather
the cost of funds
LIBOR
Fed Funds
a guaranteed profit for the bank or lending insitution
Ratings agencies *
The phrase "information asymmetry" means
information wants to be free
information has a price
different market participants have different information sets
market participants need to make a profit
different ratings agencies will differ in their ratings
Stress Testing *
Why do we engage in stress testing?
banking is a stressful business and staff must be prepared
the stress of modelling justifies high salaries
we know the Profit and loss and must find the VaR
the impact of extreme events must be considered
big losses will lead to even bigger profits
Value at Risk *
What does "risk tolerance" measure?
how much money will be made
how tolerant a market paricipant is to profits
how tolerant a market participant is to volatility
how tolerant a market participant is to expected returns
how much money will be lost
Value at Risk *
Why do regulators care about VaR?
they care about profits as well as losses
the banking system underwent extreme stress in 2007
it is a standardised model that all institutions use
because 99.9% VaR is more accurate than 99% VaR
your mama.
Value at Risk *
The assumption of a normal distribution ...
is fundamentally wrong
is fundamentally wrong for financial data
is fundamentally right
is fundamentally right for the right reasons
makes things more complicated
Value at Risk *
a 99% confidence interval implies
99% of the time you are making money in the markets
99% of the time you are losing money in the markets
99% of the time your estimates of losses in the markets are correct
99% of the time your estimates of losses in the markets are wrong
99% of the time you lose money in the markets
Value at Risk *
the phrase "excessive kurtosis" implies
small changes in value are most likely
large changes in value are most likely
small & large changes in value are more likely
small changes in value are least likely
large changes in value are least likely
Credit Risk *
What is NOT a type of credit risk
downgrade risk
interest rate risk
inflation risk
exchange rate risk
default risk
Credit Risk *
Netting allows a bank or financial institution to
protect against losses by netting trades
net off positions between two institutions
add only winning trades and ignore losing
add only losing trades and ignore winning
net credit risk to protect against default
Credit Risk *
Why might a bank insist upon collateral?
it provides security against default
up front fees are an important source of profits
some is better than none
their counterparty always does
their rules and regulations can't be changed
Credit Risk *
Investment grade bonds
are better than junk bonds
are rated CCC and above
are rated BBB and above
are higher yielding than junk bonds
provide high yield at low risk
Credit Risk *
Why are credit managment practices necessary?
to keep lending books as small as possible
to keep a control on credit risk
to keep profits as high as posible
to keep the regulators at bay
to keep volatility at a minimum
Operational Risk *
Which Basel II compliant measurement of Operational Risk will have the lowest ch
arge?
Basic Indicator Approach
Standardised Approach
Advanced Measurement Approach
Impossible to answer
VaR
Operational Risk *
What is NOT an advantage of the BIA?
easy to understand
can be used without loss data
data is already available
minimises capital charge
easy to implement
Operational Risk *
Business lines
help us undertand the regulatory framework
help us define VaR
hep us to categorise a bank's operations
help to us calculate VaR
help us to expand our results
Operational Risk *
What is NOT a disadvantage of the TSA?
may overestimate the capital charge
model correlations are perfect positive
assumes risk is the same for all business lines and all banks
doesn't explicity incorporate FX rates
is difficult to implement
Operational Risk *
Sarbanes Oxley
is an international law
is a waste of time and resources
holds CXO staff accountable
holds managers at risk
requires excessive calculations
Basel II *
Before 1988 banks
lacked any agreed global regulation
were bigger than they are now after the 2007 crash
made money by borrowing and lending at fixed rates
yes there were banks back then
kept leverage down to low, sensible levels
Basel II *
Tier 1 capitla
is permanent capital
allows banks to raise short term funds
is the best capital to hold, hence the name "Tier 1"
is fleeting
is raised by written agreements
Basel II *
the purpose of risk weights is to
adjust capital according to the risk of an asset class
adjust capital according to the whims of reguators
adjust capital according to historic losses
adjust capital by means of tax agreements
adjust capital by means of accounting measures
Basel II *
the Market Risk Capital charge includes a variable, 'k'
which is fixed
which is varies according to maturity
which is varied by the regulators
which is varied by riskyness of the assets
which is varied by means of payments
Basel II *
The Supervisory Review process of Basel II
requires traders to justify risk to regulators
requires traders to justify risk to supervisors
allows supervisors to review trades
allows regulators to review trades
none of the above
The Financial Crisis *
What was Goldman Sachs doing even as they sold CDOs to clients?
selling CDOs at record high prices
selling CDOs to non bank financial institutions
shorting the ABX
going long the ABX
none of the above
The Financial Crisis *
Describe the ratings agencies actions
proactive
reactive
making things happen
watching things happen
inactive
The Financial Crisis *
Credit Default Swaps - CDSs
should be outlawed
are weapons of mass financial destruction
don't work
make lots of money regardless of market moves
are effective if used correctly
The Financial Crisis *
Commericall paper
can be considered the canary in the financial coalmine
is riskless
is high yielding paper
should be shorted
is an asset without peer
The Financial Crisis *
Fannie Mae and Freddie Mac are NOT
government sponsored entities
guaranteed by the government
vehicles with low leverage
companies that are government owned
companies that have accepted government funds