Questions and Answers of Risk Management Financial

What is meant by a haircut in a collateral agreement?
Explain the meaning of “event of default” and an “early termination” in an ISDA master agreement.
What credit risks is a company taking when it becomes a member of a CCP and clears transactions through the CCP?
Netting affects the collateral that has to be posted and the settlement in the event of an early termination.” Explain.
What is rehypothecation?
Why are CCPs easier to regulate than banks?
What is claimed by the non‐defaulting party in an early termination under an ISDA master agreement?
Why did mortgage lenders frequently not check on information in the mortgage application during the 2000 to 2007 period?
What are the numbers in Table 7.1 for a loss rate of (a) 5% and (b) 12%? Table 7.1 Losses to Tranches in Figure 7.4. Losses to Losses to Losses to Mezzanine Equity Subprime Tranche of Tranche of
In what ways are the risks in the tranche of an ABS different from the risks in a similarly rated bond?
Explain the difference between (a) an ABS and (b) an ABS CDO.
What is meant by the term “agency costs”?
What is a waterfall in a securitization?
How did Mian and Sufi show that mortgage lenders relaxedtheir lending criteria during the 2000 to 2006 period?
Explain the influence of an increase in default correlation on (a) the risks in the equity tranche of an ABS and (b) the risks in the senior tranches of an ABS.
Explain why the end‐of‐year bonus has, in the past, been regarded as providing incentives for employees to think only about the short term.
The volatility of an asset is 2% per day. What is the standard deviation of the percentage price change in three days?
The volatility of an asset is 25% per annum. What is the standard deviation of the percentage price change in one trading day? Assuming a normal distribution with zero mean, estimate 95% confidence
Why do traders assume 252 rather than 365 days in a year when using volatilities?
What is implied volatility? What does it mean if different options on the same asset have different implied volatilities?
Suppose that observations on an exchange rate at the end of the past 11 days have been 0.7000, 0.7010, 0.7070, 0.6999, 0.6970, 0.7003, 0.6951, 0.6953, 0.6934, 0.6923, and 0.6922. Estimate the daily
The number of visitors to websites follows the power law in equation (8.1) with α = 2. Suppose that 1% of sites get 500 or more visitors per day. What percentage of sites get (a) 1,000 and (b) 2,000
Suppose that GARCH(1,1) parameters have been estimated as ω = 0.000003, α = 0.04, and β = 0.94. The current daily volatility is estimated to be 1%. Estimate the daily volatility in 30 days.
What is the difference between correlation and dependence? Suppose that y = x2 and x is normally distributed with mean zero and standard deviation one. What is the correlation between x and y ?
What is a factor model? Why are factor models useful when defining a correlation structure between large numbers of variables?
What is meant by a positive‐semidefinite matrix? What are the implications of a correlation matrix not being positive‐ semidefinite?
Suppose that the current daily volatilities of asset A and asset B are 1.6% and 2.5%, respectively. The prices of the assets at close of trading yesterday were $20 and $40 and the estimate of the
Explain what is meant by tail dependence. How can you vary tail dependence by the choice of copula?
Suppose that the marginal distributions of v1 and v2 are standard normal distributions but that a Student's t‐copula with four degrees of freedom and a correlation parameter of 0.5 is used to
In Table 9.5, what is the probability density function of v2 conditional on v1 2.Table 9.5 V V0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 0.1 0.006 0.017 0.028 0.037 0.044 0.048 0.049 0.050 0.050 0.2 0.013
Suppose that the default rate for a portfolio of consumer loans over the past 10 years has been 1%, 9%, 2%, 3%, 5%, 1%, 6%, 7%, 4%, and 1%. What are the maximum likelihood estimates of the parameters
Suppose that a bank has made a large number of loans of a certain type. The one‐year probability of default on each loan is 1.2%. The bank uses a Gaussian copula for time to default. It is
The default rates in the past 15 years for a certain category of loans are 2%, 4%, 7%, 12%, 6%, 5%, 8%, 14%, 10%, 2%, 3%, 2%, 6%, 7%, and 9%. Use the maximum likelihood method to calculate the best
An analyst calculates the expected future value of a stock index in (a) the real world and (b) the risk‐neutral world. Which would you expect to be higher? Why?
The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $3. The value of a derivative that pays off $100 after one year if a company has not
Explain why it is sometimes necessary to work in both the real world and the risk‐neutral world when carrying out a scenario analysis to determine a confidence interval for the value of a portfolio
Explain the meaning of mean reversion.
Explain Girsanov's theorem.
An investor owns 10,000 shares of a particular stock. The current market price is $80. What is the worst‐case value of the portfolio in six months? For the purposes of this question, define the
What is the difference between expected shortfall and VaR? What is the theoretical advantage of expected shortfall over VaR?
A fund manager announces that the fund's one‐month 95% VaR is 6% of the size of the portfolio being managed. You have an investment of $100,000 in the fund. How do you interpret the portfolio
A fund manager announces that the fund's one‐month 95% expected shortfall is 6% of the size of the portfolio being managed. You have an investment of $100,000 in the fund. How do you interpret the
Suppose that each of two investments has a 0.9% chance of a loss of $10 million and a 99.1% chance of a loss of $1 million. The investments are independent of each other.a. What is the VaR for one
Explain carefully the differences between marginal VaR, incremental VaR, and component VaR for a portfolio consisting of a number of assets.
Suppose that we back‐test a VaR model using 1,000 days of data. The VaR confidence level is 99% and we observe 17 exceptions. Should we reject the model at the 5% confidence level? Use a
Explain what is meant by bunching.
The change in the value of a portfolio in one month is normally distributed with a mean of zero and a standard deviation of $2 million. Calculate the VaR and ES for a confidence level of 98% and a
What assumption is being made when VaR is calculated using the historical simulation approach and 500 days of data?
Suppose we estimate the one‐day 95% VaR from 1,000 observations (in millions of dollars) as 5. By fitting a standard distribution to the observations, the probability density function of the loss
Explain how the terms risk weights and risk sensitivity are used in connection with the model‐building approach.
Suppose that a bank has $5 billion of one‐year loans and $20 billion of five‐year loans. These are financed by $15 billion of one‐ year deposits and $10 billion of five‐year deposits. Explain
Explain why long‐term rates are higher than short‐term rates most of the time. Under what circumstances would you expect long‐term rates to be lower than short‐term rates?
Describe two ways of handling interest‐rate‐dependent instruments when the model‐building approach is used to calculate VaR.
Suppose that the value of a portfolio increases by $50,000 for each one-basis-point increase in the 12‐year rate and has no other sensitivities. The multiple-vertex approach is used to model with
A portfolio has exposure to the two‐year interest rate and the five‐year interest rate. A one‐basis‐point increase in the two‐year rate causes the value of the portfolio to increase in
A six‐year bond with a continuously compounded yield of 4% provides a 5% coupon at the end of each year. Use duration and convexity to estimate the effect of a 1% increase in the yield on the price
Why are partial durations potentially more useful to an analyst than the usual duration measure?
How are “dollar duration” and “dollar convexity” defined?
What is the relationship between (a) the duration, (b) the partial durations, and (c) the DV01 of a portfolio?
Who are some of the key players involved in the decision-making about the ERM model and its current administration?
Could other DLP traders have manipulated GEDS’s transaction systems like Kerviel did?
Which of Maryellen Weimer’s classic Learner Centered Teaching (2002), “Five Key Changes to Practice” do you feel is the most important and/or challenging? Why?(a) The Balance of Power(b) The
Given the importance of globalization, how would you approach adopting LCT even if it is counter to your student’s cultural behavior?
What techniques and/or guidelines do you envision to change your role as a teacher, to “step out of the way” of learning and serve as a moderator, not a “sage on the stage” or lecturer?
How do you plan to introduce and orient your students to LCT? Do you have specific concerns about student response and their acceptance of responsibility for learning?
What represents the key success factors of the program?
What improvements would you make?
Does this represent an effective risk management program? If not, what is missing?
Would this program work for a publicly traded corporation of similar size?
How important do you view alignment and accountability among a management team?
Why might it be in a firm’s best interest to centralize the management of some risks but not others?
Describe why the organizational status quo might lead to resistance to ERM implementation. How can this potential resistance be overcome?
How do you succeed in making sure that the risk committee really turns into an ERM champion, as opposed to continuing in a silo mentality?
What are the costs and benefits of integrating the ERM risk register in the firm’s financial model to obtain “risk-adjusted” financial forecasts?
What are the key financial risk factors that a company could encounter?
What should limit Statoil’s capacity to invest in profitable new oil projects, that is, take on new risks?
For which risk factors would it be advisable to use Monte Carlo simulation to quantify the distribution of outcome?
In what cases would it be relevant for an oil company to consider effects of correlation between risk factors in quantifying risk?
Your Medical Group wants to expand by starting a new venture, owning and operating a pharmacy. In order to increase the success, you have been asked to perform an enterprise risk assessment that
Explain how improvement is measured with KPIs and give one example related to Human Capital and how this KPI might help you improve your organization.
In the UC example, the ERM Program gives weight to both data-driven activities and to culture-changing activities. Give two examples of each and then your own opinion regarding which activities you
What do you think is the difference between traditional risk management and enterprise risk management?
From the UC example, identify what aspects of their program were “carrots” and which ones were “sticks.” From your own experience describe which one you think works best in creating lasting
What are the advantages of integrating ERM with strategy and strategy execution as described in this case?
How does scenario analysis as described in this case help an organization to prepare for uncertainties?
What are the advantages of using the PAPA model to categorize risks?
How would you describe the “Strategic Risk Management Return on Investment” at LEGO?
The mission of the strategic risk management team is to “Drive conscious choice.” How does the Active Risk and Opportunity Planning (AROP) element of strategic risk management at LEGO help to
Why does a more participative management style (“tipping the pyramid over”) lead to greater responsiveness to customers’ needs, increased accountability, and more innovative solutions to
Under what circumstances might the hierarchical “command and control” structure produce superior results?
What particular factors do you believe led UGG/AU to be pioneers in ERM? Was it industry/company/history/circumstances? Was it a changed organizational “culture”? Was it good management?
Given the fact that the association is a charity, with risks related both to its financial and charitable aims and any profits made being reinvested to support its charitable aims, what do you assess
Considering the list of products in the “Background” section, how do you rate their potential risks and returns for the association, again in relation to its charitable aims and viability
In the light of the association’s financial position and its charitable aims, how high should be the risk appetite of the association? Is one of the generic strategies listed in the “Sector
Can you suggest product growth targets and appropriate risk limits that will enable the association to develop safely and dynamically in the short/medium term?The association data was drawn in 2013
How does ERM adoption and implementation in the higher education environment differ from the for-profit environment?
What type of culture is at the University of Washington? Why is culture important to consider when implementing ERM?
What were some of the key factors in the early stages of UW’s ERM adoption and implementation that led to its current success within the organization?
Why did UW decide to adopt a committee structure to administer its ERM program rather than designate a senior level Chief Risk Officer?
Sometimes risk workshops generate so many risks that it is not possible to assess all of them, while on other occasions only a small number of risks are identified and indepth assessment is possible.

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