Please answer the following questions: (Enjoy) 1. Name 3 Financial and 3 Non-Financial Risks an analyst should report as part of an ERM. 2. Which risk governance structure puts responsibility on each business unit manager? 3. IS credit risk a lower tail or upper tail risk? 4. How does a manager hedge non-financial risk exposures? 5. What are the two dimensions of Market Risk? 6. VAR at a 1% confidence level results in a higher or lower VAR then if 5% is used? 7. True or False: VAR will overestimate loss if the distribution has “fat tails”. 8. True or False: The analytical method of calculating VAR relies on the Normal Distribution. 9. Name two advantages of using the Monte Carlo method to calculate VAR. 10. True or False: Tail Value at Risk is an extension to VAR which measures the effect of an individual asset on the overall risk of the portfolio 11. Name two weaknesses to using Scenario Analysis as a complement to VAR. 12. True or False: A factor push model pushes prices and risk factors in the most advantageous and works out the combined effect on the portfolio’s value. 13. True or False: Maximum Loss optimization identifies risk factors that have the greatest potential for impacting value of the portfolio and move to protect against those factors. 14. True or False: VAR considers liquidity when measuring risk and therefore does not need to be considered.
- Financial: credit, liquidity, market; Nonfinancial: operational, herstatt, regulatory 2) decentralized 3) upper tail 4) buy insurance 5) ? 6) Higher (meaning more negative) 7) False 8) True 9) A - can model any return distribution; B - returns down need to be normally distributed 10) False 11) ? 12) False 13) True 14) False
- Name 3 Financial and 3 Non-Financial Risks an analyst should report as part of an ERM. fin: market, liquidity, credit, sovereign (kind of both) non-fin: model, settlement (herstatt), operational, regulatory 2. Which risk governance structure puts responsibility on each business unit manager? a decentralized strategy 3. IS credit risk a lower tail or upper tail risk? upper tail 4. How does a manager hedge non-financial risk exposures? insurance 5. What are the two dimensions of Market Risk? -1 6. VAR at a 1% confidence level results in a higher or lower VAR then if 5% is used? higher 7. True or False: VAR will overestimate loss if the distribution has “fat tails”. false - underestimate 8. True or False: The analytical method of calculating VAR relies on the Normal Distribution. true 9. Name two advantages of using the Monte Carlo method to calculate VAR. 1: dynamic 2: doesn’t require normal distribution - provides its own distribution 10. True or False: Tail Value at Risk is an extension to VAR which measures the effect of an individual asset on the overall risk of the portfolio false - you described ivar 11. Name two weaknesses to using Scenario Analysis as a complement to VAR. -1 12. True or False: A factor push model pushes prices and risk factors in the most advantageous and works out the combined effect on the portfolio’s value. false - pushed to the extreme, and this may or not be the best or worst case scenario 13. True or False: Maximum Loss optimization identifies risk factors that have the greatest potential for impacting value of the portfolio and move to protect against those factors. true 14. True or False: VAR considers liquidity when measuring risk and therefore does not need to be considered. false - liquidity is not considered by VAR, hence another reason VAR underestimates loss.
Nice work guys…almost all right 1. Financial- Market, Liquidity, Credit, Non-Fin- Settlement, Regulatory, Operational, Model… 2. De-centralized 3. Upper Tail 4. Insurance, but still tough to hedge 5. 1. The asset’s sensitivity to changes in a factor, and 2. changes in asset’s sensitivity to the factor. (1st and 2nd derivative, think duration, convexity) 6. Higher 7. False -underestimate 8. True 9. 1. Doesn’t require normal 2. Ability to incorporate any returns distribution 10. False…desc is IVAR 11. User estimation bias, and the fact that it doesn’t consider the effects that the movement in one variable can have on other variables (ie doesn’t acct for correlation) 12. False - disadvantageous 13. True 14. False
- Name 3 Financial and 3 Non-Financial Risks an analyst should report as part of an ERM. Financial: Interest, FX, liquidity Non Financial: Settlement, operational, legal 2. Which risk governance structure puts responsibility on each business unit manager? Decentralized 3. IS credit risk a lower tail or upper tail risk? Upper Tail 4. How does a manager hedge non-financial risk exposures? Limit exposure to any one counter party 5. What are the two dimensions of Market Risk? Systematic / Unsystematic 6. VAR at a 1% confidence level results in a higher or lower VAR then if 5% is used? Higher 7. True or False: VAR will overestimate loss if the distribution has “fat tails”. False 8. True or False: The analytical method of calculating VAR relies on the Normal Distribution. True 9. Name two advantages of using the Monte Carlo method to calculate VAR. Factor in Cash flow Can be modeled with tax 10. True or False: Tail Value at Risk is an extension to VAR which measures the effect of an individual asset on the overall risk of the portfolio False 11. Name two weaknesses to using Scenario Analysis as a complement to VAR. Based on historical events -1 12. True or False: A factor push model pushes prices and risk factors in the most advantageous and works out the combined effect on the portfolio’s value. false 13. True or False: Maximum Loss optimization identifies risk factors that have the greatest potential for impacting value of the portfolio and move to protect against those factors. True 14. True or False: VAR considers liquidity when measuring risk and therefore does not need to be considered. False