Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

Companies can benefit from risk management if their incomes fluctuate across different tax brackets.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Conditional Value at Risk is the expected loss,given that a loss occurs.

Accepted Answer

A) True 
 B)False

Question 6

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 7

A total return swap allows substitution of the total return on a bond for the total return on a loan of comparable maturity.

Accepted Answer

A) True 
 B)False

Question 8

Market risk is which of the following

Accepted Answer

A)  the risk associated with failing to properly record market transactions
B)  the risk that a dealer will lose market share to a competing dealer
C)  the risk associated with movements in such factors as interest rates and exchange rates
D)  the risk of the government declaring a transaction illegal
E)  none of the above

Question 9

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 10

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 11

Which of the following instruments could be used to execute a delta,gamma and vega hedge?

Accepted Answer

A)  a swap
B)  an option
C)  a futures
D)  an FRA
E)  none of the above

Question 12

If a firm holds a position in an option,it can delta and gamma hedge the position by adding a position in another option.

Accepted Answer

A) True 
 B)False

Question 13

Each of the following is a benefit of practicing risk management by companies except

Accepted Answer

A)  companies can manage risk better than their shareholders
B)  risk management can avoid bankruptcy costs
C)  risk management can lower taxes
D)  risk management can increase employment opportunities
E)  risk management can help prevent companies from passing up valuable investment opportunities

Question 14

The risk that errors can occur in inputs to a pricing model is called

Accepted Answer

A)  input risk
B)  model risk
C)  pricing risk
D)  valuation risk
E)  none of the above

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 methods is not used to reduce credit risk?

Accepted Answer

A)  delta-gamma-vega hedging
B)  collateral
C)  marking to market
D)  limiting the amount of business you do with a party
E)  none of the above

Question 17

Vega hedging is required only in options portfolios.

Accepted Answer

A) True 
 B)False

Question 18

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 19

Which of the following best describes the delta normal method?

Accepted Answer

A)  a method of managing a delta hedge to assure a low gamma
B)  the historical method when the distribution is normal
C)  the Monte Carlo method when price changes are normally distributed
D)  the analytical method applied to options
E)  a method of measuring changes in an option's delta

Question 20

A dealer who engages in derivatives transactions with customers of low credit quality will offer a less attractive rate.

Accepted Answer

A) True 
 B)False

Exam 15: Financial Risk Management Techniques and Applications

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

Correct AnswerverifiedShow Answer

Companies can benefit from risk management if their incomes fluctuate across different tax brackets.

Correct AnswerverifiedShow Answer

Which of the following best describes the delta normal method?

Correct AnswerverifiedShow Answer

A bond subject to default is equivalent to

Correct AnswerverifiedShow Answer

Conditional Value at Risk is the expected loss,given that a loss occurs.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following best describes a credit default swap?

Correct AnswerverifiedShow Answer

Systemic risk is

Correct AnswerverifiedShow Answer

A dealer who engages in derivatives transactions with customers of low credit quality will offer a less attractive rate.

Correct AnswerverifiedShow Answer

If a firm holds a position in an option,it can delta and gamma hedge the position by adding a position in another option.

Correct AnswerverifiedShow Answer

Which of the following methods is not used to reduce credit risk?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Each of the following is a benefit of practicing risk management by companies except

Correct AnswerverifiedShow Answer

A total return swap allows substitution of the total return on a bond for the total return on a loan of comparable maturity.

Correct AnswerverifiedShow Answer

Vega hedging is required only in options portfolios.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following instruments could be used to execute a delta,gamma and vega hedge?

Correct AnswerverifiedShow Answer

The risk that errors can occur in inputs to a pricing model is called

Correct AnswerverifiedShow Answer

Market risk is which of the following

Correct AnswerverifiedShow Answer

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