Question 1

A delta and gamma hedge is

Accepted Answer

A)  one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.
B)  one that is not guaranteed to be free of all risks
C)  effective only for small changes in the underlying instrument.
D)  all of the above statements are true
E)  none of the above statements are true

Question 2

Operational risk is more difficult to manage than market risk and credit risk.

Accepted Answer

A) True 
 B)False

Question 3

The risk that a party will not pay while the counterparty is sending payment is called

Accepted Answer

A)  wire transfer risk
B)  payment risk
C)  settlement risk
D)  cross-border risk
E)  none of the above

Question 4

Stress testing allows a firm to see how its portfolio will behave under extremely rare but favorable conditions.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following best describes a credit default swap?

Accepted Answer

A)  it is protected against default
B)  it has a higher rate to compensate for the possibility of one party defaulting
C)  it carries a higher credit rating than most other swaps
D)  it off if another party external to the swap defaults
E)  none of the above

Question 6

Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.

Accepted Answer

A)  the probability is 5 percent that the firm will lose at least $5 million in one year
B)  the probability is at least 5 percent that the firm will lose $5 million in one year
C)  the probability is 5 percent that the firm will lose $5 million in one year
D)  the probability is less than 5 percent that the firm will lose $5 million in one year
E)  none of the above

Question 7

Systemic risk is

Accepted Answer

A)  the risk of a failure of the entire financial system
B)  the risk associated with broad market movements
C)  the risk of a failure of a firm's financial risk management system
D)  the risk of large price movements throughout the financial system
E)  none of the above

Question 8

A delta and gamma hedge is one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.

Accepted Answer

A) True 
 B)False

Question 9

Potential credit risk is encountered by only one party at a time in a swap.

Accepted Answer

A) True 
 B)False

Question 10

Current credit risk is encountered is by only one party at a time in a swap.

Accepted Answer

A) True 
 B)False

Question 11

Value at Risk estimates for portfolios must take into account the correlations among the various assets and liabilities in a portfolio.

Accepted Answer

A) True 
 B)False

Question 12

Netting permits a firm to?

Accepted Answer

A)  subtract losses from price increases from losses from price decreases
B)  net its transactions with a given counterparty against each other
C)  net all of its gains against all of its losses
D)  all of the above
E)  none of the above

Question 13

The present value of the payments made to convert a bond subject to default to a default-free bond is called the

Accepted Answer

A)  Insurance cost
B)  Credit default swap premium
C)  Annuity risk factor
D)  Present value of the default volatility
E)  None of the above

Question 14

The credit risk in an interest rate swap is smallest at the beginning and at the end of the life of the swap.

Accepted Answer

A) True 
 B)False

Question 15

Legal risk is the risk that the government will declare derivatives illegal.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following positions has a negative vega?

Accepted Answer

A)  Receive fixed and pay floating LIBOR-based interest rate swap contract
B)  Short cattle futures contract
C)  Receive floating,pay fixed LIBOR-based forward rate agreement
D)  Long Apple,Inc.put option
E)  Short S&P 500 index call option

Question 17

A bond subject to default is equivalent to

Accepted Answer

A)  a payer swaption
B)  a call and a default-free bond
C)  a put and a call
D)  a default-free bond and a short put
E)  none of the above

Question 18

Value at Risk provides an estimate of the worst possible loss a firm can incur with a given probability.

Accepted Answer

A) True 
 B)False

Question 19

What is the reason for undertaking a gamma hedge?

Accepted Answer

A)  government regulation
B)  the possibility of counterparty default
C)  changes in volatility
D)  large movements in the underlying
E)  none of the above

Question 20

Eurodollar futures are widely used to hedge gamma and vega risk.

Accepted Answer

A) True 
 B)False

Exam 14: Financial Risk Management Techniques and Appplications

Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.

Correct AnswerverifiedShow Answer

The present value of the payments made to convert a bond subject to default to a default-free bond is called the

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What is the reason for undertaking a gamma hedge?

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A bond subject to default is equivalent to

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A delta and gamma hedge is one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.

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Which of the following best describes a credit default swap?

Correct AnswerAnswered by ExamLex AIShow Answer

The risk that a party will not pay while the counterparty is sending payment is called

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Which of the following positions has a negative vega?

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Value at Risk estimates for portfolios must take into account the correlations among the various assets and liabilities in a portfolio.

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Legal risk is the risk that the government will declare derivatives illegal.

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Systemic risk is

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Eurodollar futures are widely used to hedge gamma and vega risk.

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Stress testing allows a firm to see how its portfolio will behave under extremely rare but favorable conditions.

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Netting permits a firm to?

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Potential credit risk is encountered by only one party at a time in a swap.

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Current credit risk is encountered is by only one party at a time in a swap.

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Operational risk is more difficult to manage than market risk and credit risk.

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A delta and gamma hedge is

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The credit risk in an interest rate swap is smallest at the beginning and at the end of the life of the swap.

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Value at Risk provides an estimate of the worst possible loss a firm can incur with a given probability.

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Answered by ExamLex AI

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