FINRA MGMT Flashcards
The Basel Committee establishes capital charges for which type/s of risk.
I. Market Risk
II. Credit Risk
III. Operational Risk
I II and III
Which of the following statements about the delta of a call option is true?
The delta of a call option approaches 0 as it becomes deeper out of the money
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.
Risk management should be decentralized …..
p162
Alam ko ganyan start ngnatitirang choice
BABALIKAN KOOO iwill try to remember thechoice
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.
BALIKAN
Chapter 7 and 8
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
Widens
Nag wwiden credit spread pag perform worse
Which of the following statements are not consistent with the G-30 report on sound risk management practices?
Something about dealers and the marking to market… “derivatives”
p157
Nasa module ata yun
In a futures contract, a backwardation occurs when
The convenience yield is higher than the discount rate.
Backwardation: spot > future
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
Long futures, and there was a decline in oil price
(Nasa Module)
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?
Sell put options on stock A and sell stock A.
Selling put - negative delta and negative gamma
(nasa module)
p.78
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?
0.056
(if someone can explain the computation behind dis pls!)
p(25,000) * p(50,000)
(2 * .7) * (.2 * 2) = 0.056
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
-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!
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?
Sell 100 futures contracts
.75 x .032/.048 =.5
.5 x (10,000/50) = 100
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
Bank ABC smth smth incurs a mark-to-market loss smth smth
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
Buy 90 futures contracts
(Nasa Module)
P.61
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?
Buy 8 futures contract
.89 x .18/.20 = .801
.801 x (1m/100,000)= 8.01
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:
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
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
Taking a short position in Y with dollar value equal to twice the dollar value of X
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.
93100
Operational VAR (unexpected loss) refers to lower-frequency, higher-severity events (5%).
Same process sa module, iba lang given
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%
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
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?
0.107705
0.0025 - (0.010.04)/[sqrt of 0.01(1-0.01)] x [sqrt of 0.04(1-0.04)]
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?
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!!
