Question #1 of 14 Question ID: 1281314

In which of the following cases will the Taylor Series be a least likely approximation? When

the underlying asset is a:

I. polynomial of order three or more.

II. callable bond.

III. mortgage-backed security (MBS).
IV. twenty-year treasury.

A) I, II and III.

B) II, III and IV.

C) I and II.

D) I, II, III and IV.

Question #2 of 14 Question ID: 1281308

An analyst at Bergman International Bank has been asked to explain the calulation of VAR

for linear derivatives to the newly hired junior analysts. Which of the fallowing statements
best describes the calculation of VAR for a linear derivative on the S&P 500 Index?

For an options contract, multiply the VAR of the S&P 500 Index by a sensitivity factor
A) re ecting the percent change in the value futures contract for a one percent change
in the index value.

For a options contract, divide the VAR of the S&P 500 Index by a sensitivity factor
B) re ecting the percent change in the value futures contract for a one percent change
in the index value.

For a futures contract, multiply the VAR of the S&P 500 Index by a sensitivity factor
C) re ecting the percent change in the value futures contract for a one percent change
in the index value.

For a futures contract, divide the VAR of the S&P 500 Index by a sensitivity factor
D) re ecting the absolute change in the value futures contract per absolute change in
the index value.
Question #3 of 14 Question ID: 1281313

Annual
= 20.0%
volatility: σ

Annual risk-
= 6.0%
free rate

Exercise
= 24
price (X)

Time to
= 3 months
maturity

Stock price,
$21.00 $22.00 $23.00 $24.00 $24.75 $25.00
S

Value of call,
$0.13 $0.32 $0.64 $1.14 $1.62 $1.80
C

% Decrease
−16.00% −12.00% −8.00% −4.00% −1.00%
in S

% Decrease
−92.83% −82.48% −64.15% −36.56% −9.91%
in C

Delta (ΔC% /
5.80 6.87 8.02 9.14 9.91
ΔS%)

Suppose that the stock price is currently at $25.00 and the 3-month call option with an
exercise price of $24.00 is $1.80. Using the linear derivative VAR method and the information
in the above table, what is a 5% VAR for the call option's weekly return?

A) 45.3%.

B) 43.4%.

C) 21.6%.

D) 50.7%.

Question #4 of 14 Question ID: 1281321

A risk manager simulates the Worst Case Scenario (WCS) data in the following table using
10,000 random vectors for time horizons, H, of 50 and 100.

Time Horizon = H H = 50 H = 100

Expected number of Z <

1.00 2.00
−2.33

Expected number of Z <

2.00 6.00
−1.65

Expected WCS −2.02 −2.88

WCS 1 percentile −3.55 −4.02

WCS 5 percentile −2.43 −3.37

Which of the following statements is (are) correct?

I. The one percent value-at-risk (VAR) is −2.33.

II. The one percent WCS for a holding period of 100 is −2.33.
III. One percent VAR is expected to be exceeded twice over 100 trading periods.

A) I, II and III.

B) I only.

C) I and III.

D) II only.

Question #5 of 14 Question ID: 1281319

Which of the following stress testing approaches have the disadvantage of historical data
limitations?

I. Use of historical events approach.

II. Historical simulation approach.
III. Stress scenarios approach.

A) II only.

B) I and II.

C) I only.

D) I, II and III.
Question #6 of 14 Question ID: 1281307

Which of the following derivative instruments could be classi ed as linear or approximately

linear?

I. Swaption
II. Forward on commodity
III. Interest rate cap
IV. Futures on equity index
V. Currency swap

A) II, III, and IV.

B) II and IV.

C) I and III.

D) II, IV, and V.

Question #7 of 14 Question ID: 1281312

Consider a portfolio of derivatives on xed income securities and interest rates. If a Taylor

Series approximation is used to estimate the delta normal value at risk for the individual
derivatives in the portfolio, which of the following positions will have a substantially
improved estimate of value at risk?

I. Interest rate cap on 3-month LIBOR

II. Forward rate agreement on 6-month LIBOR
III. 6-month call option on Treasury bonds

A) II only.

B) III only.

C) I and III.

D) I and II.

Question #8 of 14 Question ID: 1281315

Consider the delta-normal and full-revaluation approaches to estimating the VAR of non-

linear derivative instruments. Which of the following is not a requirement for either the
delta-normal or full-revaluation approach?

A second order adjustment is made to the underlying asset VAR(1%) to account for
A)
the non-linear relationship between the derivative and the underlying asset.

The VAR(1%) of the underlying asset is adjusted by a factor re ecting the price
B)
sensitivity of the derivative price to changes in the underlying asset price.

The VAR(1%) of the asset underlying the derivative is based on an assumed normal
C)
distribution.

The VAR(1%) of the derivative is calculated by revaluing the derivative at the price
D)
corresponding to a VAR(1%) decline in the value of the underlying asset.

Question #9 of 14 Question ID: 1281318

Consider the primary methods of assessing the risk of a portfolio position through stress
testing. Which of the following does not accurately describe an advantage or disadvantage
related to a stress testing method?

An advantage of the historical crisis approach is that it requires no assumptions

A)
regarding the underlying distribution of portfolio returns.

A disadvantage to the historical simulation approach is that it is limited to historical

B)
data which may be inappropriate in future periods.

An advantage to the stress scenario analysis method is that it accounts for asset-
C)
class-speci c risk factors.

A disadvantage to the stress scenario analysis method is that it can produce

D)
misleading risk measures.

Question #10 of 14 Question ID: 1281316

Which of the following statements regarding the structured Monte Carlo approach is
correct?

I. The general equation assumes the underlying asset has normally distributed returns
with a mean of μ and a standard deviation of σ.
II. The structured Monte Carlo (SMC) approach can address multiple assets with multiple
risk exposures by generating correlated scenarios based on a statistical distribution.
III. In some cases where it does not produce an accurate forecast of future volatility,
increasing the number of simulations can improve the forecast.

A) II and III.

B) I, II and III.

C) I and II.

D) I and III.

The relationship between a three month call option and its underlying stock are presented
in the following table.

Volatility:Volatility: = 15.0%

Risk-free rateRisk-
= 6.0%
free rate

Exercise price
(X)Exercise price = 24
(X)

Time to
maturityTime to = 3 months
maturity

SS = $25.00

C = $1.60

Stock Price, S $21.00 $22.00 $23.00 $24.00 $24.75 $25.00

Value of Call, C $0.04 $0.15 $0.42 $0.91 $1.41 $1.60

Percentage
−16.00% −12.00% −8.00% −4.00% −1.00%
Decrease in S

Percentage
−97.46% −90.39% −73.55% −43.37% −11.92%
Decrease in C

Delta (ΔC%/ΔS%) 6.09 7.53 9.19 10.84 11.92

Question #11 - 12 of 14 Question ID: 1281310

Using the linear derivative VAR method and the information in the above table, what is a ve

percent VAR for the call option's weekly return?

A) 15.8%.

B) 10.8%.

C) 40.9%.

D) 21.3%.

Question #12 - 12 of 14 Question ID: 1281311

Using the linear derivative VAR method and the information in the table, and assuming 255

trading days in a year, what is a 1-percent VAR for the call option's daily return?

A) 26.1%.

B) 43.4%.

C) 15.8%.

D) 11.9%.

Question #13 of 14 Question ID: 1281320

Which of the following statements most accurately describe an appropriate step in the

structured Monte Carlo (SMC) approach for measuring risk?

I. Simulate thousands of valuation outcomes for the underlying assets.

II. Measure the value-at-risk (VAR) for the portfolio of derivatives based on the simulated
outcomes.

A) II only.

B) I only.

C) Both I and II.

D) Neither I nor II.

Question #14 of 14 Question ID: 1281317

An analyst at Burns Holdings, Inc. is considering using simulation analysis to calculate the

VAR of the rm's assets. The analyst has read the following comments from a colleague
about the structured Monte Carlo (SMC) approach. Which of the statements regarding the

SMC approach are true?

I. An advantage to the SMC approach is that inaccurate future volatility forecast can be

improved by running more simulations.

II. SMC approach cannot predict extreme values from correlation breakdowns if the

underlying covariance matrix relies on normal market volatility.

III. A disadvantage of the SMC approach is that it can only be used to estimate VAR for

portfolios with long only positions.

IV. SMC estimates the underlying asset prices and returns through the following

stochastic process: st+1,i = st × eμ + σ × z

V. An advantage to the SMC approach is that multiple risk factors can be incorporated
into VAR estimate by incorporating correlation estimates.

A) II and IV.

B) II, IV, and V.

C) I, II, III, and V.

D) I, III, and V.