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FINRA MGMT > FINRA MGMT > Flashcards

FINRA MGMT Flashcards

1
Q

The Basel Committee establishes capital charges for which type/s of risk.
I. Market Risk
II. Credit Risk
III. Operational Risk

A

I II and III

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2
Q

Which of the following statements about the delta of a call option is true?

A

The delta of a call option approaches 0 as it becomes deeper out of the money

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3
Q

Which of the following is not an essential feature of organizational structure for it to be sound and effective?

The Chief Risk Officer (CRO) must not report directly to head of Treasury.

Risk managers should report not to traders but to top management.

Risk management should be decentralized to enable a firm-wide approach covering market, credit and operational risks.

A

Risk management should be decentralized …..

p162
Alam ko ganyan start ngnatitirang choice
BABALIKAN KOOO iwill try to remember thechoice

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4
Q

Which of the following examples does not illustrate an interplay between credit and market risk?

A corporate bond’s price declines due to changing expectations of the issuer’s credit capacity.

Prices of European sovereign bonds decline as a result of the sovereign debt crisis that affects the credit appetite for bonds issued by European nations.

A

BALIKAN

Chapter 7 and 8

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5
Q

Consider a long position in a corporate bond and a short position in a Treasury bond with the same duration. Credit spread risk for this position is when the credit spread of the corporate bond

Tightens.
Widens

A

Widens

Nag wwiden credit spread pag perform worse

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6
Q

Which of the following statements are not consistent with the G-30 report on sound risk management practices?

A

Something about dealers and the marking to market… “derivatives”

p157

Nasa module ata yun

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7
Q

In a futures contract, a backwardation occurs when

A

The convenience yield is higher than the discount rate.

Backwardation: spot > future

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8
Q

In the early 1990s, Metallgesellschaft, a German oil company, suffered a loss of $1.33 billion in their hedging program. They rolled over short-dated futures to hedge long-term exposure created through their fixed-price contracts to sell heating oil and gasoline to their customers. After a time, they abandoned the hedge because of large negative cash flow. The cash flow pressure was due to the fact that the company had to hedge its exposure by

A

Long futures, and there was a decline in oil price

(Nasa Module)

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9
Q

A portfolio of stock A and options on stock A is currently delta neutral, but has a positive gamma. Which of the following actions will make the portfolio both delta and gamma neutral?

A

Sell put options on stock A and sell stock A.

Selling put - negative delta and negative gamma

(nasa module)

p.78

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10
Q

Consider the following Sample Loss Frequency and Severity Distributions. Assume also that these distributions are independent. What is the probability of having a total loss of 75,000?

A

0.056

(if someone can explain the computation behind dis pls!)

p(25,000) * p(50,000)
(2 * .7) * (.2 * 2) = 0.056

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11
Q

What is the implied correlation between JPY/EUR and EUR/USD when given the following volatilities for foreign exchange rates?

S3= JPY/USD 10%
S1= JPY/EUR 12%
S2= EUR/USD 8%

Yung sino si S3 siya ung di minention sa taas so siya hahanapin

A

-0.5625

10^2 = 8^2 + 12^2 + 2p(12*8)
100 = 64 + 144 + 2p(96)
-108 = 2p96
-1.125 = 2p
-0.5625 = p (GOT IT!) YAY TY TIGER!

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11
Q

A bronze producer will sell 10,000 metric tons of bronze in three months at the prevailing market price at that time. The standard deviation of the price of bronze is 3.2%. The company decides to use three-month futures on copper to hedge. The copper futures contract is for 50 metric tons of copper. The standard deviation of the futures price is 4.8%. The correlation between the changes in futures price and the price of bronze is 0.75. To hedge its exposure and minimize the resulting variance, how many futures contracts should the company buy/sell?

A

Sell 100 futures contracts

.75 x .032/.048 =.5
.5 x (10,000/50) = 100

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11
Q

Which of the following examples does not indicate a type of liquidity risk?

Bank ABC bought a large position in a stock with very thin bid-offer quotes. As a result of doing so, the offers at various prices were taken pushing the stock price higher to trade at significantly higher prices.

Bank ABC has a total of PhP 20 billion assets maturing today as compared to a total of PhP 30 billion liabilities maturing today. To pay off the P 10 billion remaining liabilities, the bank has to scramble for funds in the market at distressed interest rates in order to meet its obligations.

Bank ABC smth smth incurs a mark-to-market loss smth smth

A

Bank ABC smth smth incurs a mark-to-market loss smth smth

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12
Q

An airline knows that it will need to purchase 10,000 metric tons of jet fuel in three months. It wants some protection against an upturn in prices using futures contracts. The company can hedge using heating oil futures contracts traded on NYMEX. The notional for one contract is 42,000 gallons. As there is no futures contract on jet fuel, the risk manager wants to check if heating oil could provide an efficient hedge instead. The current price of jet fuel is $277/metric ton. The futures price of heating oil is $0.6903 /gallon. The standard deviation of the rate of change in jet fuel prices over three months is 21.17%, that of futures price is 18.59%, and the correlation is 0.8243. The optimal hedge ratio can be achieved by

A

Buy 90 futures contracts

(Nasa Module)

P.61

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13
Q

A company expects to buy 1 million barrels of West Texas Intermediate crude oil in one year. The annualized volatility of the price of a barrel of WTI is calculated as 18%. The company chooses to hedge using futures contracts on Brent Crude. The futures contract is for 100,000 barrels. The annualized volatility of the Brent futures is 20% and the correlation coefficient between WTI crude oil and Brent futures is 0.89. To hedge its exposure and minimize the resulting variance, how many futures contracts should the company buy/sell?

A

Buy 8 futures contract

.89 x .18/.20 = .801
.801 x (1m/100,000)= 8.01

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14
Q

The VAR of a portfolio of stocks using a two-day horizon is Php 20,000,000. Assuming daily returns are independent, identically distributed and are normally distributed, the VAR using a 5-day horizon is
Select one:

A

PhP 31,622,776.6

20m * sqrt 5/2 (mas madali to diba)
Dibiy dibiy var horizon over _ day horizon

Hanapin ang 1 day VAR then multiply by sqrt of 5

20M / sqrt 2 = VAR(1-day)
VAR(1-day) * sqrt 5

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15
Q

Given that two currencies, X and Y, are perfectly positively correlated and the volatility (expressed in dollars) of X is twice the volatility Y. If a long position in X is to be hedged using Y, the optimal hedge ratio can be achieved by

A

Taking a short position in Y with dollar value equal to twice the dollar value of X

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16
Q

Given the following frequency and severity distributions, find the Operational VAR (unexpected loss) at a confidence level of 95%. Assume that the distributions are independent.

A

93100

Operational VAR (unexpected loss) refers to lower-frequency, higher-severity events (5%).

Same process sa module, iba lang given

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17
Q

What is the implied correlation between JPY/USD and EUR/USD when given the following volatilities for foreign exchange rates?

S3= 12%
S1=10%
S2=8%

A

0.125

12^2 = 10^2 + 8^2 - 2p(10*8)
144 = 100 + 64 - 2p(80)
-20 = -2p(80)
-0.25 = -2p
0.125 = p

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18
Q

Consider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A-rated and B-rated bonds are 1% and 4%, respectively, and that the joint probability of default of the two bonds is 0.25%. What is the default correlation between the two bonds?

A

0.107705

0.0025 - (0.010.04)/[sqrt of 0.01(1-0.01)] x [sqrt of 0.04(1-0.04)]

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19
Q

An airline knows that it will need to purchase 10,000 metric tons of jet fuel in three months. It wants some protection against an upturn in prices using futures contracts. The company can hedge using heating oil futures contracts traded on NYMEX. The current price of jet fuel is $277/metric ton. The standard deviation of the rate of change in jet fuel prices over three months is 21.17%, and the correlation between rate of change in jet fuel prices and rate of change in heating oil futures prices is 0.8243. Assuming the company hedges at the optimal hedge ratio, what is the resulting standard deviation of the value of the hedged portfolio?

A

331,997.97

It’s 331,997.97 nasa example to sa module but hindi naka box

p.62

Gets! Unhedged pala yung 586k, thank you!!

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20
Q

The VAR of a portfolio of stocks using a five-day horizon is PhP 10,000,000. Assuming daily returns are independent, identically distributed and are normally distributed, the VAR using a 10-day horizon is

A

PhP 14,142,135.62

10 m * sqrt 10/5

21
Q

Loss given default represents the non-recoverable amount portion of

Potential Exposure
Credit VAR
None of the above
Exposure at default

A

Exposure at default

21
Q

Given the following 30 ordered percentage returns of an asset, calculate the VAR at 90% confidence level: -20, -18, -15, -10, -7, -6, -5, -5, -4, -4, -3, -3, -1, -1, -1, -1, 0, 0, 0, 1, 1, 1, 3, 3, 3, 3, 7, 10, 15, 21

A

15

How was this computed?

n = (1-p) * N
n = (1-.90) *30
10% x 30 = 3 —> 3rd worst observation

“p x # of observations” -th observation of the distribution

PAGDOLLAR SHORT FALL HINAHANAP:
20+18 = 38/2 = 19

22
Q

Inflation-protected bonds are exposed to which type of market risk?

A

Real Interest Rate Risk

23
Q

Which of the following statements are true regarding the position assumptions when computing VAR?

A

It is assumed that all positions are constant over the horizon.

(i feel eto kasi i saw sa module) p.16

24
Q

Consider the following Sample Loss Frequency and Severity Distributions. Assume also that these distributions are independent. What is the expected loss?

A

37375

(0.1520.625000)+(0.1520.2550000)+(0.1520.15200000)+(0.350.625000)+(0.350.2550000)+(0.350.15*200000)

p.146

ACCOUNT FOR ALL POSSIBLE OUTCOMES ^^

24
Q

Consider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A-rated and B-rated bonds are 2% and 3%, respectively, and that the joint probability of default of the two bonds is 0.25%. What is the default correlation between the two bonds?

A

0.079557

25
Q

Which of the following portfolios is not applicable to a linear method in computing VAR?

Portfolio USDPHP options
Portfolio of peso government securities

Other choices:
Spot trading yung isa ata
Dollar ROP options the other one i think

A

BALIKAN

Spot trading (basing on the screenshot)

26
Q

Which of the following statements describes the amortization effect that occurs in measuring credit exposure of an interest rate swap?

A

BALIKAN
P.111, 118
Ask the passers

As time approaches maturity, duration DECREASES?

27
Q

A portfolio manager has been asked to take the risk related to the default of two securities A and B. She has to make a large payment if, and only if, both A and B default. For taking this risk, she will be compensated by receiving a fee. What can be said about this fee?

A

The fee will be larger if the default of A and of B are highly correlated.

(nasa module)

28
Q

What is the correct interpretation of a $5 million overnight VAR figures with 95% confidence level?

A

Can be expected to lose at least $5 million in 5 out of 100 days

(1-p) = 1-.95 = 0.05

Similar sa example from the module

29
Q

Consider the following single bond position with market value of PhP 1,000,000, a modified duration of 4 years, an annualized yield volatility of 12%. Using the duration method and assuming that the daily returns on the bond position are independent, identically distributed and are normally distributed, calculate the VAR of the positions with 99% confidence level and 5-days holding period and assume that there are 260 business days in a year.

A

155094.17

1m * 4 yrs = 4 m (dollar duration)
4m * 2.33 * 0.12 * sqrt of 5/260 = 155094.17

note: 99% one-tailed alpha = 2.33

30
Q

Consider a short position of $50 million on gold for two weeks and a long position of $50 million on gold for 1 month. Which of the following risks is not present in such a position?

A

Spot risk

This is in the module compilation

31
Q

Which of the following statements about VAR parameters is not correct?

The higher the confidence level, the higher the VAR (correct)

The higher the confidence level, the less amount of expected backtest exceptions. (correct din ata)

The longer the horizon, the greater is the VAR measure. (correct)

A

The last choice n lng isagot niyo gais

Parameters are confidence level and horizon
The higher the confidence level, the higher VAR
The longer horizon, the higher VAR

P. 16

The longer the horizon, the greater is the VAR measure. (correct)

32
Q

In a fixed exchange rate system, currency risk arises due to possible

Yield Curve Steepening

Other options:
Yield Curve Flattening
Devaluation or Revaluation
Appreciation or Depreciation

A

Devaluation or Revaluation

33
Q

Which of the following statements about option theta is true?

A

Theta increases as it approaches expiry

34
Q

The VAR of a portfolio of stocks using a one-day horizon is Php 5,000,000. Assuming daily returns are independent, identically distributed and are normally distributed, the VAR using a 10-day horizon is

A

hP 15,811,388.30

5,000,000 *
10

35
Q
  1. Which of the following statements about the delta of a put option is true?
A

The delta of a put option approaches -1 as it becomes deeper IN the money.

At the money= -.5
In the money = -1
Out of the money = 0

Pag put option, -0 :»>

36
Q
  1. In measuring credit exposure, the current exposure component is
A

The current market value of the asset.

37
Q
  1. A 90-day European call option on PLDT shares has an exercise price of PhP 2,500. The current market price of PLDT shares is PhP 2,502. The delta for this option is close to
A

0.5 (ATM)

(because it is a call, it should be positive)

38
Q
  1. Beta, or systematic risk can be viewed as a measure of the exposure of the rate of return of a stock (or portfolio of stocks) to movements in the
A

So “markets” ba ang sagot? Yes i think

39
Q
  1. Which of the following statements describes the diffusion effect that occurs in measuring credit exposure of an interest rate swap?
A

… volatility of the risk factor increases

40
Q
  1. Settlement risk can be minimized by bilateral netting agreements wherein
A

It involves settling the net balance without gross amounts

41
Q
  1. Which of the following statements about VAR is not true?
A

Remember the caveats of VAR too :)
Caveats:
VAR does not describe the worst loss
VAR does not describe the losses in the left tail.
VAR is measured with some error

42
Q
  1. Which of the following statements about option rho is true?
A

Call option is positive

42
Q
  1. Under which scenario is basis risk likely to exist?
    The tenor of the underlying instrument and the hedging instrument are not the same

Other choices:
All of the above

A

All of the above

43
Q
  1. Which of the following will lead to credit loss to bank ABC if its counterparty defaults before maturity of the contract?
A

Bank ABC is short EUR through an FX forward contract and the EUR has appreciated.

44
Q
  1. How does the credit exposure of a long OTC put option on XYZ stock change when the stock price decreases?
A

It increases

45
Q
  1. Which of the following statements about option vega is true?
A

Vega is highest for long-term at-the-money options

46
Q
  1. Which of the following statements about the risk involved in Commercial Banking is the most accurate
A

Commercial Banking has more credit risk than market risk

47
Q
  1. Which of the terms below is used in the insurance industry to refer to the effect of a reduction in the control of losses by an entity that is insured because of the protection provided by insurance?
A

Moral Hazard

47
Q
  1. Which of the following are the two drivers of downside risk (market risk)?
A

Exposures and Risk Factors

48
Q
  1. Stress testing is designed to complement VAR in which of the following way
A

Stress testing aims to account for extreme losses that are not captured by VAR.

FINRA MGMT (1 decks)

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