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2.
3.
4.
Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.
a.
the probability is 5 percent that the firm will lose at least $5 million in one year
b.
the probability is at least 5 percent that the firm will lose $5 million in one year
c.
the probability is 5 percent that the firm will lose $5 million in one year
d.
the probability is less than 5 percent that the firm will lose $5 million in one year
e.
none of the above
5.
6.
7.
8.
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b.
c.
d.
e.
9.
Systemic risk is
a.
the risk of a failure of the entire financial system
b.
the risk associated with broad market movements
c.
the risk of a failure of a firms financial risk management system
d.
the risk of large price movements throughout the financial system
e.
none of the above
10.
Which of the following is the primary impetus for the growth in the practice of risk management?
a.
faster computers
b.
better pricing models
c.
improved knowledge of risk management
d.
tighter government regulation
e.
concern over volatility
11.
12.
Find the number of Eurodollar futures each having a delta of -$25 that would delta-hedge a portfolio of a
long position in swaps with a delta of $5,000 and a short position in a put option with a delta of -$2,300.
a.
long 292 contracts
b.
short 108 contracts
c.
short 292 contracts
d.
long 200 contracts
e.
long 108 contracts
13.
14.
15.
Which of the following statements is not true about a credit spread option?
a.
it is an option on the spread of a bond over a reference bond
b.
its value would change with changes in investors perceptions of a partys credit quality
c.
it requires payment of a premium up front
d.
it requires that the underlying bond be relatively liquid
e.
none of the above
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16.
17.
If a firm engages in risk management to capture arbitrage profits, what is it easy to overlook?
a.
the additional credit risk it assumes
b.
the cost is greater than the benefit
c.
the market risk is high
d.
all of the above
e.
none of the above
18.
19.
The risk that errors can occur in inputs to a pricing model is called
a.
input risk
b.
model risk
c.
pricing risk
d.
valuation risk
e.
none of the above
20.
Which of the following techniques is a more appropriate risk management tool for a company in which asset
value is not easily measurable?
a.
stress risk
b.
credit value at risk
c.
market risk
d.
delta at risk
e.
cash flow at risk
21.
22.
The risk that a party will not pay while the counterparty is sending payment is called
a.
wire transfer risk
b.
payment risk
c.
settlement risk
d.
cross-border risk
e.
none of the above
23.
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e.
24.
Which of the following instruments could be used to execute a delta, gamma and vega hedge?
a.
a swap
b.
an option
c.
a futures
d.
an FRA
e.
none of the above
25.
Which of the following is approximately the Value at Risk at 5 percent of a portfolio of $10 million of asset
A, whose expected return is 15 percent and volatility is 35 percent, and $15 million of asset B, whose
expected return is 21 percent and volatility is 30 percent, where the correlation between the two assets is 0.2.
a.
b.
c.
d.
e.
$5.6 million
$10 million
$15 million
$1.25 million
none of the above
26.
27.
28.
29.
Delta, gamma, and vega hedging is rather complex. Identify the false statement.
a.
Requires the use of four hedging instruments
b.
At least one of the instruments has to be an option
c.
Involves designing a portfolio where delta, gamma, and vega are set equal to zero
d.
Typically involves the solution to three simultaneous equations
e.
All of the above statements are true
30.
31.
The present value of the payments made to convert a bond subject to default to a default-free bond is called
the
th
9 Edition: Chapter 15
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a.
b.
c.
d.
e.
Insurance cost
Credit default swap premium
Annuity risk factor
Present value of the default volatility
None of the above
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1.
Earnings at Risk is a better risk measure for a derivatives dealer than is Value at Risk.
2.
One good reason for practicing risk management is that arbitrage opportunities can be
earned.
3.
Conditional Value at Risk is the expected loss, given that a loss occurs.
4.
5.
If a firm holds a position in an option, it can delta and gamma hedge the position by
adding a position in another option.
6.
7.
8.
A dealer who engages in derivatives transactions with customers of low credit quality will
offer a less attractive rate.
9.
Netting allows a significant reduction in credit risk but increases market risk
10.
11.
The credit risk in an interest rate swap is smallest at the beginning and at the end of the
life of the swap.
12.
Eurodollar futures are widely used to hedge gamma and vega risk.
13.
Operational risk is more difficult to manage than market risk and credit risk.
14.
15.
Value at Risk provides an estimate of the worst possible loss a firm can incur with a given
probability.
16.
Value at Risk estimates for portfolios must take into account the correlations among the
various assets and liabilities in a portfolio.
17.
Stress testing allows a firm to see how its portfolio will behave under extremely rare but
favorable conditions.
F.
18.
Credit derivatives are derivatives that are insured against credit losses.
19.
Model risk can occur when the wrong pricing models are used.
20.
Companies can benefit from risk management if their incomes fluctuate across different
tax brackets.
21.
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22.
The historical method of estimating Value at Risk uses the performance of the portfolio
over the last ten years.
23.
The Monte Carlo simulation method of estimating Value at Risk is one of the most flexible
methods because it permits the user to assume any probability distribution.
24.
A total return swap allows substitution of the total return on a bond for the total return on a
loan of comparable maturity.
25.
Legal risk is the risk that the government will declare derivatives illegal.
26.
One reason firms manage risk with derivatives is to lower bankruptcy costs.
27.
Credit risk is the uncertainty of a firms value or cash flow that is associated with
movements in an underlying source of risk.
28.
A delta and gamma hedge is one in which the combined spot and derivatives positions
have a delta of zero and a gamma of zero.
29.
The historical method for computing Value at Risk estimates the distribution of the
portfolios performance by collecting data on the past performance of the portfolio and
using it to estimate the future probability distribution.
30.
31.
A CDS premium is paid by the CDS seller to the CDS buyer to transfer the credit risk.
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