Questions on Market Risk

1133 Words5 Pages
Dr. Sudhakar Raju

FN 6700


1. What is meant by market risk?

2. Why is the measurement of market risk important to the manager of a financial institution?

3. What is meant by daily earnings at risk (DEAR)? What are the three measurable components? What is the price volatility component?

4. Follow bank has a $1 million position in a five-year, zero-coupon bond with a face value of $1,402,552. The bond is trading at a yield to maturity of 7.00 percent. The historical mean change in daily yields is 0.0 percent, and the standard deviation is 12 basis points.

a. What is the modified duration of the bond?

b. What is the maximum adverse
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15. What are the advantages of using the Back Simulation (Historical Simulation) approach to estimate market risk? Explain how this approach would be implemented.

16. Export Bank has a trading position in Japanese Yen and Swiss Francs. At the close of business, the bank had ¥300,000,000 and SF 10,000,000. The exchange rates for the most recent six days (Day 0 being today) are given below:

DAY 0 1 2 3 4 5

Japanese Yen 112.13 112.84 112.14 115.05 116.35 116.32 Swiss Francs 1.4140 1.4175 1.4133 1.4217 1.4157 1.4123

a. What is the foreign exchange (FX) position in dollar equivalents using the FX rates on Day 0 (today)?

b. What is the definition of delta as it relates to the FX position?

c. What is the sensitivity of each FX position; that is, what is the value of delta for each currency today?

d. Assume that you have data for the 500 trading days preceding today. Explain how you would identify the worst-case scenario with a 95 percent degree of confidence?

e. Explain how the five percent value at risk (VAR) position would be interpreted for business tomorrow?

17. What is the primary disadvantage to the historical (back) simulation approach in measuring market risk? What affect does the inclusion of more observation days have as a

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