1 - Market Risk Measurement & Management Flashcards
1
Q
Estimate VaR using a historical simulation approach
A
.
2
Q
Estimate VaR using a parametric approach for both normal and log normal distributions
A
.
3
Q
Estimate the expected shortfall given profit and loss (P/L) or return data.
A
.
4
Q
Describe coherent risk measures.
A
.
5
Q
Evaluate estimators of risk measures by estimating their standard errors.
A
.
6
Q
Interpret quantile-quantile (QQ) plots to identify the characteristics of a distribution.
A
.
7
Q
Apply the bootstrap historical simulation approach to estimate coherent risk measures.
A
.
8
Q
Describe historical simulation using non-parametric density estimation.
A
.
9
Q
Compare and contrast the age-weighted, the volatility-weighted, the correlation-weighted and the filtered historical simulation approaches.
A
.
10
Q
Identify advantages and disadvantages of non-parametric estimation methods.
A
.
11
Q
Explain the importance and challenges of extreme values in risk management.
A
.
12
Q
Describe Extreme Value Theory (EVT) and its use in risk management.
A
.
13
Q
Describe the peaks-over-threshold (POT) approach.
A
.
14
Q
Compare and contrast the generalized extreme value and POT approaches to estimating extreme risks.
A
.
15
Q
Evaluate the tradeoffs involved in setting the threshold level when applying the generalized Pareto (GP) distribution.
A
.
16
Q
Explain the multivariate EVT for risk management.
A
.
17
Q
Describe backtesting and exceptions and explain the importance of backtesting VaR models.
A
.
18
Q
Explain the significant difficulties in backtesting a VaR model.
A
.
19
Q
Verify a model based on exceptions or failure rates.
A
.
20
Q
Identify and describe Type I and Type II errors in the context of a backtesting process.
A
.
21
Q
Explain the need to consider conditional coverage in the backtesting framework.
A
.
22
Q
Describe the Basel rules for backtesting.
A
.
23
Q
Explain the principles underlying VaR mapping and describe the mapping process.
A
.
24
Q
Explain how the mapping process captures general and specific risks.
A
.
25
Differentiate among the three methods of mapping portfolios of fixed income securities.
.
26
Summarize how to map a fixed income portfolio into positions of standard instruments.
.
27
Describe how mapping of risk factors can support stress testing.
.
28
Explain how VaR can be computed and used relative to a performance benchmark.
.
29
Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.
.
30
Explain the following lessons on VaR implementation: time horizon over which VaR is estimated, the recognition of time varying volatility in VaR risk factors, and VaR backtesting.
.
31
Describe exogenous and endogenous liquidity risk and explain how they might be integrated into VaR models.
.
32
Compare VaR, ES, and other relevant risk measures.
.
33
Compare unified and compartmentalized risk measurement.
.
34
Compare the results of research on top-down and bottom-up risk aggregation methods.
.
35
Describe the relationship between leverage, market value of asset, and VaR within an active balance sheet management framework.
.
36
Describe financial correlation risk and the areas in which it appears in finance.
.
37
Explain how correlation contributed to the global financial crisis of 2007-2009.
.
38
Describe the structure, uses, and payoffs of a correlation swap.
.
39
Estimate the impact of different correlations between assets in the trading book on the VaR capital charge.
.
40
Explain the role of correlation risk in market risk and credit risk.
.
41
Relate correlation risk to systemic and concentration risk.
.
42
Describe how equity correlations and correlation volatilities behave throughout various economic states.
.
43
Calculate a mean reversion rate using standard regression and calculate the corresponding autocorrelation.
.
44
Identify the best-fit distribution for equity, bond, and default correlations.
.
45
Explain the purpose of copula functions and the translation of the copula equation.
.
46
Describe the Gaussian copula and explain how to use it to derive the joint probability of default of two assets.
.
47
Summarize the process of finding the default time of an asset correlated to all other assets in a portfolio using the Gaussian copula.
.
48
Explain the drawbacks to using a DV01-neutral hedge for a bond position.
.
49
Describe a regression hedge and explain how it can improve a standard DV01-neutral hedge.
.
50
Calculate the regression hedge adjustment factor, beta.
.
51
Calculate the face value of an offsetting position needed to carry out a regression hedge.
.
52
Calculate the face value of multiple offsetting swap positions needed to carry out a two-variable regression hedge.
.
53
Compare and contrast level and change regressions.
.
54
Describe principal component analysis and explain how it is applied to constructing a hedging portfolio.
.
55
Calculate the expected discounted value of a zero-coupon security using a binomial tree.
.
56
Construct and apply an arbitrage argument to price a call option on a zero-coupon security using replicating portfolios.
.
57
Define risk-neutral pricing and apply it to option pricing.
.
58
Distinguish between true and risk-neutral probabilities and apply this difference to interest rate drift.
.
59
Explain how the principles of arbitrage pricing of derivatives on fixed income securities can be extended over multiple periods.
.
60
Define Option-Adjusted Spread (OAS) and apply it to security pricing.
.
61
Describe the rationale behind the use of recombining trees in option pricing.
.
62
Calculate the value of a constant maturity Treasury swap, given an interest rate tree and the risk- neutral probabilities.
.
63
Evaluate the advantages and disadvantages of reducing the size of the time steps on the pricing of derivatives on fixed-income securities.
.
64
Evaluate the appropriateness of the Black-Scholes-Merton model when valuing derivatives on fixed income securities.
.
65
Explain the role of interest rate expectations in determining the shape of the term structure.
.
66
Apply a risk-neutral interest rate tree to assess the effect of volatility on the shape of the term structure.
.
67
Estimate the convexity effect using Jensen’s inequality.
.
68
Evaluate the impact of changes in maturity, yield, and volatility on the convexity of a security.
.
69
Calculate the price and return of a zero-coupon bond incorporating a risk premium.
.
70
Construct and describe the effectiveness of a short-term interest rate tree assuming normally distributed rates, both with and without drift.
.
71
Calculate the short-term rate change and standard deviation of the rate change using a model with normally distributed rates and no drift.
.
72
Describe methods for addressing the possibility of negative short-term rates in term structure models.
.
73
Construct a short-term rate tree under the Ho-Lee Model with time-dependent drift.
.
74
Describe uses and benefits of the arbitrage-free models and assess the issue of fitting models to market prices.
.
75
Describe the process of constructing a simple and recombining tree for a short-term rate under the Vasicek Model with mean reversion.
.
76
Calculate the Vasicek Model rate change, standard deviation of the rate change, expected rate in T years, and half-life.
.
77
Describe the effectiveness of the Vasicek Model.
.
78
Describe the short-term rate process under a model with time-dependent volatility.
.
79
Calculate the short-term rate change and determine the behavior of the standard deviation of the rate change using a model with time-dependent volatility.
.
80
Assess the efficacy of time-dependent volatility models.
.
81
Describe the short-term rate process under the Cox-Ingersoll-Ross (CIR) and lognormal models.
.
82
Calculate the short-term rate change and describe the basis point volatility using the CIR and lognormal models.
.
83
Describe lognormal models with deterministic drift and mean reversion.
.
84
Describe a volatility smile and volatility skew.
.
85
Explain the implications of put-call parity on the implied volatility of call and put options.
.
86
Compare the shape of the volatility smile (or skew) to the shape of the implied distribution of the underlying asset price and to the pricing of options on the underlying asset.
.
87
Describe characteristics of foreign exchange rate distributions and their implications on option prices and implied volatility.
.
88
Describe the volatility smile for equity options and foreign currency options and provide possible explanations for its shape.
.
89
Describe alternative ways of characterizing the volatility smile.
.
90
Describe volatility term structures and volatility surfaces and how they may be used to price options.
.
91
Explain the impact of the volatility smile on the calculation of an option’s Greek letter risk measures.
.
92
Explain the impact of a single asset price jump on a volatility smile.
.
93
Describe the changes to the Basel framework for calculating market risk capital under the Fundamental Review of the Trading Book (FRTB) and the motivations for these changes.
.
94
Compare the various liquidity horizons proposed by the FRTB for different asset classes and explain how a bank can calculate its expected shortfall using the various horizons.
.
95
Explain the FRTB revisions to Basel regulations in the following areas: (1) - Classification of positions in the trading book compared to the banking book; (2) - Backtesting, profit and loss attribution, credit risk, and securitizations.
.
