Quiz1

Question 1

Commodity Risk

Answer 1

Risk due to changes in Raw materials

Question 2

Currency Risk

Answer 2

Risk due to changes in exchange rates

Question 3

Interest Rate Risk

Answer 3

Risk due to changes in interest Rates

Question 4

Equity Risk

Answer 4

Probable loss due to market volatility

limited to systematic risk

Question 5

Transaction Currency Risk

Answer 5

When currency exchange rates might change between the time of a transaction and time of settlement

Question 6

Operating Currency Risk

Answer 6

Unexpected changes in currency exchange rates will adversely affect future operations

Currency Economic Risk

Question 7

Translation Currency Risk

Answer 7

Net assets invested in a foreign country whose functional currency is not that of the parent company may be exposed to loss in value when converted to the parent currency

Question 8

Risk, Uncertainty, Ignorance, Not Feasible

Answer 8

Risk: Probability Known, Outcome Known
Uncertainty: Probability Unknown, Outcome Known
Not Feasible: Probability Known, Outcome Unknown
Ignorance: Probability Unknown, Outcome Unknown

Question 9

Expected Utility Theory & Prospect Theory

Answer 9

EUT: Expected Value (Risk lovers vs risk averse)
PT: Gain Domain/Loss Domain (Risk Seeking w/ losses)

Question 10

Interest Rate Risk

Fixed Asset & Liability

Answer 10

Market Yield = Coupon; change in yield doesn’t change value

Market Yield < Coupon; drop in yield –> increase in value

Market Yield > Coupon; increase in yield –> Decrease in value

Question 11

Interest Rate Risk Floating Asset and Liability

Answer 11

A > L; Increase in interest = Favorable, Decrease = Unfavoralbe
A = L; increase or decrease = immunized
A < L; Increase in interest Rate = Unfavorable, Decrease = Favorable

Question 12

Asset is Floating & Liability is Fixed

Answer 12

Cash flow risk exposure with Assets

Fair Value risk exposure with Liability

Question 13

Asset is Fixed & Liability is Floating

Answer 13

Fair Value risk exposure with Asset

Cash Flow Risk Exposure with Liability

Question 14

Credit Risk

Answer 14

Risk of Default

Question 15

Liquidity Risk

Answer 15

Risk of not being able to convert its assets into cash without incurring significant losses; inability to meet obligations and continue operations

Question 16

Interest Rate Risk Takes Two Forms: Cash FLow Risk and Value Risk

Answer 16

Cash Flow Risk: impact of a change in interest Rates on a firm’s future cash flow
Value Risk: Impact of a change in interest rates on the value of a firm’s asset

Question 17

EDF, Expected Default Frequency

Answer 17

(Asset Value - Debt Value )/ SD of Asset = # sd’s to default

Question 18

Interest Rate GAP

Answer 18

RSAt - RSLt = GAPt

Dollar amount interest rate sensitive assets less dollar amount interest rate sensitive liabilities

RSA RSL = asset or liabilitiy that would be repriced

Negative GAP is bad

Change in net interest income = GAP * change in yield

Question 19

Reprice Definition

Answer 19

Interest rate will reset before maturity

Question 20

Generic Measures of Risk (4)

Answer 20

Max - Min
Bid - Ask Spread
Maturity Range
Basis Risk

Question 21

Z scores for confidence intervals: How much are you likely to lose?

Answer 21

Z for 99% = 2.33
Z for 97.5% = 1.965
Z for 95% = 1.645

Multiply Z by standard deviation to the amount you are likely to lose

Question 22

Measuring Credit Risk: CAMELS

Answer 22

Capital Adequacy
Asset Quality
Management
Earnings
Liquidity 
Sensitivity to Market