Chapter 1

Question 1

Definition of risk:

Answer 1

Volatility of unexpected outcomes (values of assets or liabilities of interest)

Question 2

Financial risk (Jorion, 2001)

Answer 2

Possible losses owing to financial markets activities, such as losses due to interest rate movement or default on financial obligations

Question 3

Financial risk management

Answer 3

Process by which financial risk are identified, assessed, measure and manage in order to create economic value

Question 4

Types of financial risk

Answer 4

Market risk
Credit risk
Liquidity risk

Question 5

What is market risk

Answer 5

Arise from movement in the level or volatility of market prices

Question 6

What is credit risk

Answer 6

Risk carried by lender that a debtors will not able to pay their debt
Risk that a counterparty in financial agreement cannot fulfill their commitment

Question 7

Liquidity risk

Answer 7

Assets liquidity risk: transaction cannot be conducted at prevailing market price due to the size of the position relative to normal funding lots

Funding liquidity risk: inability to meet payment obligations

Question 8

Derivative

Answer 8

Contract deriving it’s value from some underlying asset price, reference rate or index (stock,bond, currency or commodity)

Question 9

Derivative (definition)

Answer 9

Instrument design to manage financial risk efficiently

Question 10

Example derivative

Answer 10

Forward contract on foreign currency

Question 11

Types of derivative

Answer 11

1972: foreign currency futures
1973: equity options
1983: options on equity, options on currency futures
1996: electricity future
1997: weather derivative

Question 12

Value at risk

Answer 12

The worst loss over a target horizon with a given level of confidence

Question 13

VaR

Answer 13

Describe the quantiles of the projected distribution of gains and losses over a target horizon

Corespond to 1-c lower tail value