True or False Questions on Risk Management

Question Implied GPT Verified Answer CVAR models measure risk exposures by True True TRUE estimating a metric of unexpected credit losses which is the difference on the...

Question Implied GPT Verified Answer CVAR models measure risk exposures by True True TRUE estimating a metric of unexpected credit losses which is the difference on the mean and extreme loss percentile of a credit portfolio's profit-and- loss distribution for a horizon. VaR can be calculated from either the probability True False FALSE distribution of gains or losses during the a particular period but limited to given normal Not strictly limited market conditions only. Model Building approach is frequently used for False False FALSE investment portfolio and less popular for trading portfolios because it does not work well when It is often used for trading deltas are high. portfolios In testing the accuracy of volatility in VaR, the True / True SKIP standard error increases as the sample size False considered is increased but only as the square root of the sample. Black-Scholes pricing model is largely used by False (?) True FALSE option traders who buy options that are priced over the formula calculated value, and sell options Market price > Black-Scholes that are priced lower than the Black-Scholes price → Sell the option. calculated value. Market price < Black-Scholes price → Buy the option. Expected shortfall is a result of stressed VaR False False FALSE often found in the tail loss portion but is more simple and less complex as compared to VaR.F More complex than VAR in risk analysis, confidence interval is a statistical False True TRUE calculation measuring the validity of a correlation or the certainty of a forecast or projection on values. Power Laws states that a relative change in one True True TRUE quantity results in a proportional relative change in another, connoting “nonlinearity” or a disproportionate relationship between cause and effect. As the number of market risk factors increases True True TRUE and their co-movements become more complex, Monte Carlo simulations become more difficult to run. The default probabilities that are based on True True TRUE historical data, such as produced by rating agencies, are known to be assumed or estimated likelihood on payment of credit activities. Marginal VaR allows risk managers to study the True True TRUE effects of adding or subtracting positions from an investment portfolio and compare to the latter to determine into its contributions. The bootstrap is consistent and limited with the False False FALSE use of actual historical period and its respective data that the vector may be optionally disregarded Do not disregard vectors in simulating the portfolio. Expected shortfall is known as condensed VaR, True True TRUE often found in the tail loss portion but is more complex as compared to VaR on the perspective of a Risk Manager. In determining the VAR using the bootstrap FALSE False FALSE method, historical periods are randomized in the dapat with the use of algorithm as the cross-section of forward Not going backward returns (the vector = the daily return for each stock in the portfolio) is used to simulate the portfolio going backward. The higher the VaR confidence level required, the False False FALSE higher the standard error but the latter decreases when sample size is decreased. Standard error decreases with increasing sample size INVERSELY PROPROTION Between Monte Carlo simulation and Bootstrap False True TRUE Method, the latter represents the randomness and stochastic nature of market data through algorithm. Monte Carlo Simulation draws random numbers True True TRUE over a large number of times which will give a good indication of what the output of the formula should be. Model Building lets the data determine the joint False False FALSE probability distribution and daily percentage changes in market variables while the Historical Model Building involves Simulation assumes a particular form for this assumptions about distribution. distributions, while Historical Simulation uses observed data. VaR can be calculated exclusively from the False False FALSE probability distribution of losses during the a particular period limited to given stochastic VaR can be calculated under market conditions. different market conditions, not limited to a specific set of stochastic conditions. Theta is the positive of the derivative of the True False FALSE option price with respect to the option time in years divided by 2. Theta is typically negative because it reflects the loss of time value as expiration approaches. Theta is the rate of change in the fair value of the True True SKIPP option per one day decrease in the option time when other variables remain constant. False ?? false intrinsic value yan Rho is the derivative of the option price with True - eto False FALSE respect to the risk-free rate, either divided by 2. akin False Rho is the derivative of the HELP, false option price with respect to ba the risk-free rate, but dividing shetttttttt it by 2 is not a standard definition. Gamma and theta will be at its peak value when True False AT = fair value the call option’s strike price is below the market False (1) IN = over price of the underlying asset. Gamma and theta peak when OUT= under the option is at-the-money, not when the strike price is FALSE below the market price. Delta will be a number between -.1 and 1.0 for a False False FALSE short call (or a long put) and 0.0 and 1.0 for a short put (or a long call); depending on price, a call The range for a short call is call option behaves as if one owns 1 share of the positive between -1.0 and 0.0, not underlying stock (if deep in the money). put -0.1 and 1.0 negative Puts always have a negative delta (ranging from -1 True True TRUE to 0), while Long Calls always have a positive delta (ranging from 0 to 1), so the two can be used together to create a delta-neutral position. The total delta of a complex portfolio of positions True True TRUE on the same underlying asset can be calculated by simply taking the sum of the deltas for each individual position – delta of a portfolio is linear in the constituents. The Taylor expansion is an infinite expansion with True True TRUE increasing powers of Δy of which only the first two terms are used by industry practitioners as they are good indicators of asset price changes relative to other assumptions made for valuing financial assets. Vanna, vomma and veta are third derivative of False FALSE Greeks that determine the value of vega in terms true of spot price, interest rate and time to expiry respectively. The autoregression in the GARCH Model contains True False PASS timely variables, while the conditional heteroskedasticity means that the scale of the Conditional error term is independent on the size of the errors heteroskedasticity means the in previous time periods. scale of the error term depends on the size of errors in previous time periods. EWMA is designed as such that older False False FALSE observations are given higher weights and the weights increases exponentially as the data point EWMA, older observations gets older. are given lower weights, not higher The Greeks are the quantities representing the False False FALSE sensitivity on the interest of derivatives such as options to a change in underlying parameters on Should be The Greeks represent which the value of an instrument or portfolio of dependent sensitivity to underlying financial instruments is independent. parameters on which the value of an instrument depends, not is independent. Traders that have long-term objectives should True True TRUE avoid allowing themselves to be influenced by the short-term overreaction of markets to prevent liquidity black holes. One type of risk prominent in the financial crisis False True TRUE was the inability of many financial institutions to secure funding to finance their long term liabilities resulting to systemic risk and eventually to a stressed market. Speed, ultima and color are third derivatives of False True FALSE Greeks that determine the value of Gamma in terms of spot price, time expiry and volatility respectively.