Which of the following statements about the interest rates and option prices is correct?
A. If rho is positive, rising interest rates increase option prices.
B. If rho is positive, rising interest rates decrease option prices.
C. As interest rates rise, all options will rise in value.
D. As interest rates fall, all options will rise in value.
When looking at the distribution of portfolio credit losses, the shape of the loss distribution is ___ , as the likelihood of total losses, the sum of expected and unexpected credit losses, is ___ than the likelihood of no credit losses.
A. Symmetric; less
B. Symmetric; greater
C. Asymmetric; less
D. Asymmetric; greater
Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio?
A. Credit VaR
B. Probability of default
C. Loss given default
D. Modified duration
Which one of the following four statements regarding commodity derivative risks is INCORRECT?
A. Because of the different demand/supply balance in each region and the cost of transporting the oil between regions, a tanker of Brent crude oil in the UK will have a different value to a UK buyer than a tanker of Arab light crude oil in Singapore, which results in the basis risk.
B. Calendar spreads represent a special case of basis risk and occur when the relative prices of commodity futures do not come in alignment and the trader becomes exposed to the absolute price movements.
C. In most commodities, the longest term contracts are the most volatile, while the shortest term forward contract are the least volatile.
D. Some commodities can be both in backwardation and a have a strong seasonal element.
For two variables, which of the following is equal to the average product of the deviations from their respective means?
A. Standard deviation
B. Kurtosis
C. Correlation
D. Covariance
Bank Sigma has an opportunity to do a securitization deal for a credit card company, but has to retain a portion of the residual risk of the deal with an estimated VaR of $8 MM. Its fees for the deal are $2 MM, and the short-term financing costs are $600,000. What would be the RAROC for this transaction?
A. 25%
B. 17.5%
C. 33%
D. 12%
Bank Sigma takes a long position in the oil futures market that requires a 2% margin, i.e., the bank has to deposit 2% of the value of the contract with the broker. The futures contracts were priced at $50 per barrel (bbl) at inception, and rose by $5 to $55. The VaR on the position is estimated to be $10. What is the return on this transaction on a risk adjusted basis?
A. 50%
B. 10%
C. 500%
D. 20%
Which of the following reports have been suggested by the FDIC that banks should produce in addition to the usual probabilistic analysis and stress tests in order to gauge liquidity issues?
A. Cash flow gaps
II. Funding availability
III. Critical assumptions used in credit projections
B. I, II
C. I, II, III
D. I
E. I, III
Bank Omega is using futures contracts on a well capitalized exchange to hedge its market risk exposure. Which of the following could be reasons that expose the bank to liquidity risk?
A. The bank may not be able to unwind the futures contracts before expiration.
II. Prices may move such that a loss results on the hedge.
III. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.
IV. Exchange margin requirements could change unexpectedly.
B. III, IV
C. I, III, IV
D. I, II, III, IV
E. I, IV
If a bank is long ?00 million pounds, short ?00 million in delta-equivalent pound options, and long ?00 million in pound-denominated stocks, what is the amount of pound exposure that would be shown in the aggregated risk reports?
A. ?00 million pounds
B. ?00 million pounds
C. ?00 million pounds
D. ?00 million pounds