1. Market risk is the uncertainty of an FI’s earnings resulting from changes in market conditions such as interest
rates and asset prices.
2. As securitization of assets continues to expand, the management of market risk will become more important
to FIs.
3. Income from trading activities of FIs is less important today than the traditional activities of banks.
4. Assets and liabilities that are expected to require extensive time to liquidate are normally placed in the
investment portfolio.
5. Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by
mid-2009.
6. The major traders of mortgage-backed securities prior to the recent financial crisis were investment banks
and securities firms.
7. Although financial markets deteriorated during the summer of 2009, by September of that year the banking
system had returned to normal operation.
8. Market risk management is important as a source of information on risk exposure for senior management.
9. Considering the market risk of traders’ portfolios for the purpose of establishing logical position limits per
trader in each area of trading is a resource allocation benefit of market risk measurement.
10. If a trader in charge of an investment portfolio of an FI generates returns that are higher than other traders at
the FI, she should be rewarded with higher compensation.
11. Market risk is the potential gain caused by an adverse movement in market conditions.
12. Banks are limited by regulation to using the historic or back simulation method to quantify market risk
exposure.
13. Daily earnings at risk is defined as the dollar value of a position times price sensitivity.
14. Market value at risk (VAR) is defined as the daily earnings at risk (DEAR) times the number of days (N).
15. Price volatility is the price sensitivity times the potential adverse move in yield.
16. Price volatility of a bond can be estimated by multiplying the bond’s modified duration by the adverse daily
yield move.
17. In estimating price sensitivity, the JPM model prefers to use modified duration over the present value of
cash flow changes.
18. The JPM RiskMetrics model generally prefers using the present value of cash flow changes as the
price-sensitivity weights.
19. Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns
between the different assets.
20. The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.
21. The JPM RiskMetrics model is based on the assumption of a binomial distribution of asset returns.
22. The back simulation approach to estimating market risk exposure requires normally distributed asset returns,
but does not require correlations of asset returns.
23. The back simulation approach to estimating market risk exposure requires the use of daily prices or returns
for some period of immediately recent history.
24. One advantage of RiskMetrics over back simulation is that RiskMetrics provides a worst case scenario
value.
25. A disadvantage of the back simulation approach to estimate market risk exposure is the limited confidence
level based on the number of observations.
26. Monte-Carlo simulation is a process of creating asset returns based on actual trading days so that the
probabilities of occurrence are consistent with recent historical experience.
27. One of the reasons for the development of internal risk measurement models is the proposal of the BIS to
impose capital requirements on the trading portfolios of FIs.
28. Banks in the countries that are members of the BIS must use the standardized framework to measure market
risk exposures.
29. In the BIS standardized framework model, the specific risk charge attempts to measure the decline in the
liquidity or credit risk quality of the trading portfolio over the holding period.
30. In the BIS standardized framework model, the general market risk weights reflect the product of the
modified durations and interest rate shocks.
31. As compared to the BIS standardized framework model for measuring market risk, the internal models
allowed by the large banks are subject to audit by the regulators.
32. A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the
general market risk charge in the BIS framework.
33. In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks
for each maturity.
34. In the BIS framework, horizontal offsets within time zones are used to adjust residual positions between
zones.
35. In the early 2000s the market risk capital requirement uniformly was a large proportion of the total risk
capital requirements for the largest US banks.
36. The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was
37. Conceptually, an FI’s trading portfolio can be differentiated from its investment portfolio by
38. Regulators usually view tradable assets as those held for horizons of
39. Which term defines the risk related to the uncertainty of an FI’s earnings on its trading portfolio caused by
changes, and particularly extreme changes in market conditions?
40. The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer
holding periods
41. How can market risk be defined in absolute terms?
42. Which benefit of market risk measurement (MRM) provides senior management with information on the
risk exposure taken by FI traders?
43. Market risk measurement considers the return-risk ratio of traders, which may allow a more rational
compensation system to be put in place. Thus MRM aids in
44. Using the MRM to identify the potential return per unit of risk in different areas by comparing returns to
market risk in areas of trading so more capital and resources can be directed to these areas is considered to be
which of the following?
45. A reason for the use of MRM for the purpose of identifying potential misallocations of resources caused by
prudential regulation is which of the following?
46. The earnings at risk for an FI is a function of
47. In calculating the VAR of fixed-income securities in the RiskMetrics model
48. Daily earnings at risk (DEAR) is calculated as
49. When using the JPM RiskMetrics model, price volatility is calculated as
50. In the JPM RiskMetrics model, VAR is calculated as
51. Which of the following securities is most unlikely to have a symmetrical return distribution, making the use
of JPM RiskMetrics model inappropriate?
52. Which of the following is a problem encountered while using more observations in the back simulation
approach?
53. Considering the Capital Asset Pricing Model, which of the following observations is incorrect?
54. If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be
55. If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account
is
56. The capital requirements of internally generated market risk exposure estimates can be met