Financial Risk Manager Handbook 6th Edition Philippe Jorion - Solutions

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Your project team is very visually oriented and seems to understand concerns better when they can see where they’re coming from. You were planning to brainstorm a long list of risks, but realize that a large list might serve only to minimize discussion, rather than support it. You want to use the
percent.5. Contact the chief financial officer and tell her you believe you can manage the overspending situation.
percent, but you have eleven months in which to recover.What should you do?1. Contact the chief financial officer and let her manage the overspending situation.2. Give it another month to see if you continue to overspend.3. Document the overspending and your rationale for expecting it to improve.4.
The escalation rules for your organization are clear. Anytime a project exceeds planned spending during a fiscal year by 3 percent or more, the causes must be identified, and the risk of continued overspending must be escalated to the chief financial officer. It’s the first month of the new
Your organization is ardent about the use of nondisclosure agreements, particularly as they apply to corporate policy. Everyone working on every project is required to sign such an agreement and stick to it. In the middle of a risk meeting, your customer asks if you have thought about the risks
One of your team members identifies a major, previously undisclosed risk in the middle of your latest meeting. The room is a hive of activity as the discussion intensifies. The team seems energized by the discussion and you are anxious to learn more about the implications of the risk.To deal with
You are going to use brainstorming to gather risk data. What can you expect? (Pick two)1. Team members will provide detailed analysis of their ideas as well as the ideas of their peers.2. Team members will share ideas openly and freely until every last idea is exhausted.3. Data gathered will be
Your team members are cooperative and able to get tasks done in a reasonable amount of time.Each one has a clear understanding of their place in the team and works strictly on their responsibility. They don’t jump over to others to lend a hand, but instead work on their tasks alone. Where is this
You’re trying to achieve a consensus of experts, but know that they don’t get along well. In working through this process with your risk team, what’s the best approach for gathering data from these people?1. Focus groups 2. Brainstorming 3. Meetings 4. The Delphi technique 5. The nominal
Which is the most important risk question in a Scrum setting?1. What are you doing today?2. What’s going wrong on your tasks?3. What did you do yesterday?4. Who is managing your risk?5. What’s standing in your way?
You and your project team want to have the best possible risk communication. This will likely happen using which of the following communications modes?1. Face-to-face meetings 2. Virtual meetings 3. Teleconferences 4. Email 5. Risk registers
Which of the following statements regarding data, information, and reports is true?1. Data, information, and reports are three names for the same thing.2. Data have the most inherent bias, whereas reports have the least.3. Reports have the most inherent bias, whereas data has the least.4. Data are
A risk breakdown structure (RBS) is a breakdown of what information?1. It’s a breakdown of risk responses, according to their owners.2. It’s a breakdown of risks, according to their sources.3. It’s a breakdown of risk processes, according to their owners.4. It’s a breakdown of risks,
In a RACI chart, two of your team members are marked as “A.”1. That means there are two parties who will be accountable.2. That means there are two parties who will be advised on the state of the project.3. That means there are two team members sharing responsibility for the risk and/or its
Your project is being conducted using an Agile methodology. Specifically, you’re applying the Scrum method. Some of the best risk information in this environment will come from what source?1. The customer, who understands the most about their environment 2. The team members, during regular weekly
The risk breakdown structure is a breakdown of risks. By what categorization are they broken down?1. It depends on the RBS 2. Risk owners 3. Risk responses 4. Project divisions 5. Risk sources
Which of the following steps in the process involves the development of plans to deal with the probability and/or impact of individual risks, which may involve doing nothing?1. Risk management planning 2. Risk identification 3. Risk analysis 4. Risk response development 5. Risk response
One element you might find in a risk management plan would be which of the following?1. A project-specific risk 2. An organizationally specific risk 3. A risk category 4. The definition of high probability 5. The outcome of a particular risk response
From a risk management perspective, PESTLE represents what?1. The sources of risk to allow for risk categorization 2. The risks on the project, sorted by their generic names 3. A heavy tool with a rounded end, used for crushing and grinding substances 4. The risk process steps by their more generic
In sequence, the risk management process is which of the following?1. Identify, analyze, manage, develop responses, and implement responses.2. Analyze, identify, manage, develop responses, and implement responses.3. Manage, identify, analyze, develop responses, and implement responses.4. Manage,
Management has told you that they want to encourage everyone to become more involved in the risk management process. Your best opportunity to make this happen is to do what?1. Provide rigid instructions on how to apply the risk management process.2. Support the risk owners by taking on the more
Your team members have a reputation for being somewhat gruff in their encounters with customers and others in the “outside world.” The team members don’t feel a need for social niceties in their day-to-day work encounters. As one team member put it, We have plenty of dirtunder our fingernails
Yours is a small project in a multi-billion-dollar enterprise. The organization last year suffered a malware attack that cost it $4.5 million. Your project is worth less than half-a-million dollars.Last year’s attack put the organization on high alert for phishing scams and denial-of-service
Your organization is conducting work in an abandoned salt mine in Romania. The project is heavily insured, even though the probability of cave-ins is minimal. The billion-dollar insurance policy for the project has a $1,000,000 deductible. The million dollars represents what?1. The amount of risk
As you drive down the road, you worry about the steep cliff beyond the berm. It looks perilous.You try not to focus on it, but it’s there and unnerving. You continue down the road and feel the vibration of a set of rumble strips under your tires. The rumble strips are designed to serve in what
Two of your team members, Serena and Yvonne, are on opposite ends of the spectrum. Serena believes in the motto of Take Chances and Make Mistakes, whereas Yvonne is much more in the camp of Get It Right the First Time. Up until now, it hasn’t caused many problems, but in the last two meetings,
Your 17-year-old child just drove your car into a ditch. As a risk expert, you explain to them that they have reached what?1. A threshold 2. A tolerance 3. The limits of their risk appetite 4. The limits of their risk attitude 5. The end of your rope
You didn’t think it was possible, but you found a corner of the world where the best Internet speeds are measured in Mb, rather than Gb. These slow speeds are compounded by the fact that the power grid is dicey at best. Not only that, your building tends to be about a foot underwater during much
You have a project sponsor who has been a true champion for your project. She has shown up for team meetings, promoted the project with her peers and superiors, and keeps close watch to see if there’s anything she can do to help. In a traditional Power/Interest salience model, she is likely in
Your project was to be conducted in Youngstown, Ohio, but is instead going to be developed by the team in Kuala Lumpur, Malaysia. You selected vendors in the greater Youngstown area and now have to contact them to see if they can handle the work on the other side of the world. When you selected
Your organization seems documentation happy. They record action items in every risk meeting and they follow through on what’s been documented. The archives are maintained by a skilled librarian, and there are regular retrospectives to review and share lessons learned. In considering
The organization has declared that your project will not exceed $2,000,000, no matter what.They will not spend a dime beyond that point. Team member Ahmed has identified a risk that would push project costs well beyond the $2 million mark. He keeps telling you that you don’t need to worry,
Bobbie Martini was just assigned as the risk owner for the risk that a team member may be struck by a train in the project’s implementation. Their primary job is to do what?1. Communicate the status of the team and the train.2. Track the shifting nature of the risk, apply any responses, and
Management wants to ensure that everyone understands the nature of the project’s goals and your interpretations of what may impede progress toward those goals. This can be achieved through the project charter. Who signs off on the project charter?1. The project manager 2. The project sponsor 3.
A risk archive will likely include what documentation?1. The risk register, the risk breakdown structure, and the risk repository 2. The risk register, to examine current project risks, and the risk repository, to examine past and current projects and their risks 3. The risk register, to examine
You are reviewing extensive documentation regarding the risks in your project, including their probabilities and impacts. You are likely reviewing which document?1. The issues log 2. The risk log 3. The risk repository 4. The risk breakdown structure 5. The risk register
Your only key vendor (Acme) went out of business three years ago. Your risk repository still includes the risk statement that Acme may go out of business, causing supply chain delays. What does this risk statement represent?1. A lesson learned 2. An action item for the risk manager 3. An action
You are asked to estimate the exposure of a hedge fund to the S&P 500.Though the fund claims to mark to market weekly, it does not do so and merely marks to market once a month. The fund also does not tell investors that it simply holds an exchange-traded fund (ETF) indexed to the S&P 500.Because
For a portfolio of illiquid assets, hedge fund managers often have considerable discretion in portfolio valuation at the end of each month and may have incentives to smooth returns by marking values below actual, in high-return months and above actual, in low-return months. Which of the following
Asset liquidity risk is most pronounced fora. A $10 million position in distressed securitiesb. A $10 million position in Treasury bondsc. A $100 million position in distressed securitiesd. A $100 million position in Treasury bonds
The Big Bucks hedge fund has the following description of its activities. It uses simultaneous long and short positions in equity with a net beta close to zero. Which of the following statements about Big Bucks is/are correct?I. It uses a directional strategy.II. It is a relative value hedge
Suppose the payoff from a merger arbitrage operation is $5 million if successful, −$20 million if not. The probability of success is 83%. The expected payoff on on the operation isa. $5 millionb. $0.75 millionc. $0 since markets are efficientd. Symmetrically distributed
A major acquisition has just been announced, targeting company B. The bid from company A is an exchange offer with a ratio of 2. Just after the announcement, the prices of A and B are $50 and $90, respectively.A hedge fund takes a long position in company B hedged with A’s stock.After the
Identify the risk in a convertible arbitrage strategy that takes long positions in convertible bonds hedged with short positions in Treasuries and the underlying stock.a. Short implied volatilityb. Long durationc. Long stock deltad. Positive gamma
Identify the risks in a fixed-income arbitrage strategy that takes long positions in interest rate swaps hedged with short positions in Treasuries.a. The strategy could lose from decreases in the swap-Treasury spread.b. The strategy could lose from increases in the Treasury rate, all else fixed.c.
A fund of hedge funds combines a mix of strategy sectors, managers, and styles, and therefore fund of funds risk managers need to understand the common attributes of hedge fund strategies. Which of the following statements is incorrect?a. Equity market neutral funds aim to generate returns that
A relative value hedge fund manager holds a long position in asset A and a short position in asset B of roughly equal principal amounts. Asset A currently has a correlation with asset B of 0.97. The risk manager decides to overwrite this correlation assumption in the variance-covariance-based VAR
Continuing with the previous question, assume the stock market went up by 20% last year. Ignore the risk-free rate and idiosyncratic risk, and assume the average beta of both long and short positions is 1. Over the same period, the return on the fund should be abouta. 20%b. 15%c. 10%d. 5%
Which of the following statements is/are correct?I. Using VAR as the risk budgeting measure, the emerging markets class has the smallest risk budget.II. If an additional dollar were added to the portfolio, the marginal impact on portfolio VAR would be greatest if it were invested in small caps.III.
Suppose a portfolio consists of four assets. The risk contribution of each asset is as follows: UK large cap, 3.9%; UK small cap, 4.2%; UK bonds, 0.9%; non-UK bonds, 1.1%. Which of the following would not be a possible explanation for the relatively high risk contribution values for UK equities?a.
The AT&T pension fund has 68%, or about $13 billion, invested in equities.Assume a normal distribution and volatility of 15% per annum. The fund measures absolute risk with a 95%, one-year VAR, which gives $3.2 billion.The pension plan wants to allocate this risk to two equity managers, each with
A database of hedge fund returns is constructed as follows. The first year of the database is 1994. All funds existing as of the end of 1994 that a willing to report their verified returns for that year are included in that year. The database is extended by asking the funds for verified returns
Portfolio Q has a beta of 0.7, an expected return of 12.8%, and an equity risk premium of 5.25%. The risk-free rate is 4.85%. Calculate Jensen’s alpha measure for portfolio Q.a. 7.67%b. 2.70%c. 5.73%d. 4.27%
Assume that a hedge fund provides a large positive alpha. The fund can take leveraged long and short positions in stocks. The market went up over the period. Based on this information,a. If the fund has net positive beta, all of the alpha must come from the market.b. If the fund has net negative
Your firm hired Vikram Mehra as an active manager for its pension fund.His benchmark is the Russell 2000 growth index. Which of the following statistics are most suitable to evaluating Vikram’s performance and risk?a. VAR and Sharpe ratiob. Tracking error and information ratioc. Tracking error
The DataSoft Corporation has an employee pension scheme with fixed liabilities and a long time horizon reflecting its young workforce. The fund’s assets are $9 billion and the present value of its liabilities is $8.8 billion.Which of the following statements are incorrect?I. The present value of
The AT&T pension fund reports total assets worth $19.6 billion and liabilities of $17.4 billion. Assume the surplus has a normal distribution and volatility of 10% per annum. The 95% surplus at risk over the next year isa. $360 millionb. $513 millionc. $2,860 milliond. $3,220 million
The AT&T pension plan reports a projected benefit obligation of $17.4 billion. If the discount rate decreases by 0.5%, this liability will increase by$0.8 billion. Based on this information, the liabilities behave like aa. Short position in the stock marketb. Short position in cashc. Short position
Over the past year, the HIR Fund had a return of 7.8%, while its benchmark, the S&P 500 index, had a return of 7.2%. Over this period, the fund’s volatility was 11.3%, while the S&P index’s volatility was 10.7% and the fund’s TEV was 1.25%. Assume a risk-free rate of 3%. What is the
Your bank is implementing the AIRB approach for credit risk, the AMA for operational risk, and the internal models approach for market risk. The chief risk officer (CRO) wants to estimate the bank’s total risk by adding up the regulatory capital for market risk, credit risk, and operational risk.
In the latest guidelines for computing capital for incremental risk in the trading book, the incremental risk charge (IRC) addresses a number of perceived shortcomings in the 99%/10-day VAR framework. Which of the following statements about the IRC are correct?I. For all IRC-covered positions, the
As a risk manager for Bank ABC, John is asked to calculate the market risk capital charge of the bank’s trading portfolio under the 1996 internal models approach. The VAR (95%, one-day) of the last trading day is USD 30,000;the average VAR (95%, one-day) for the last 60 trading days is USD
Which of the following best describes the quantitative parameters of the 1996 internal models approach?a. Ten-day trading horizon, 99% confidence interval, minimum one year of data, minimum quarterly updatesb. One-day trading horizon, 95% confidence interval, five years of data, updated weeklyc.
The 1996 amendment to the Capital Accord requires that internal modelsa. Utilize at least six months of historical datab. Utilize at least one year of equally weighted historical datac. Utilize enough historical data so that the weighted average age of the data is at least six monthsd. Utilize two
Which of the following is not a drawback of the Basel II foundation internal ratings-based (IRB) approach?a. PDs and LGDs are assumed to be uncorrelated.b. Asset correlations decrease with increasing PDs.c. The portfolio of the financial institution is assumed to be infinitely granular.d. The
The Basel II risk weight function for the internal ratings-based (IRB) approach is based on the asymptotic single risk factor (ASRF) model, under which the the system-wide risks that affect all obligors are modeled with only one systematic risk factor. The major reason for using the ASRF is:a. The
Under the comprehensive approach for the foundation internal ratings-based approach under Basel II, which of the following methods is used for calculating the effective loss given default (LGD∗) where: LGD∗ is the effective loss given default (considering risk mitigation measures), LGD is that
Which of the following statements is not correct about the foundation IRB and the advanced IRB approaches for credit risk capital charges in Basel II?a. Under the advanced IRB approach, banks are allowed to use their own estimates of PD, LGD, EAD, and correlation coefficient but must use the risk
Which of the following statements about the Basel II capital requirements is false?a. It increases the risk sensitivity of minimum capital requirements for internationally active banks.b. It addresses only credit risk and market risk.c. U.S. insurance companies are not required to comply with Basel
A bank that funds itself at LIBOR − 5bp purchases an A+ rated corporate floating coupon loan paying LIBOR + 15bp. Based on the Basel I minimum capital requirements, what is the annualized return on regulatory capital for this loan?a. 2.5%b. 5.0%c. 11%d. None of the above
The Basel I Accord computes the credit exposure of derivatives using both replacement cost and an add-on to cover potential future exposure. Which of the following is the correct credit risk charge for a purchased seven-year OTC equity index option of $50 million notional with a current mark to
A bank subject to the Basel I Accord makes a loan of $100 million to a firm with a risk weight of 50%. What is the basic on-balance-sheet credit risk charge?a. $8 millionb. $4 millionc. $2 milliond. $1 million
Consider the following financial data for a bank, in millions of dollars:shareholders’ funds: 627.4; retained earnings: 65.6; undisclosed reserves:33.5; goodwill: 21.3; subordinated debt: 180.0; specific provisions: 11.7.The ratio of tier 2 to tier 1 capital is:a. 30.81%b. 31.78%c. 33.53%d. 34.03%
Consider a bank balance sheet with (1) common stock of USD 600,000,000;(2) unrealized long-term marketable equity securities gain: USD 5,000,000;(3) allowance in anticipation of possible credit losses: USD 5,000,000;(4) goodwill: USD 30,000,000.Based solely on this information, the tier 1 and tier
What is the best definition of tier 1 regulatory capital?a. Equity capital, retained earnings, disclosed reservesb. Subordinated debt, undisclosed reservesc. Equity capital, subordinated debt with a maturity greater than five yearsd. Long-term debt, revaluation reserves
For regulatory capital calculation purposes, what market risks must be incorporated into a bank’s VAR estimate?a. Risks in the trading account relating to interest rate risk and equity riskb. Risks in the trading account relating to interest rate risk and equity risk, and risks throughout the
The bank you work for has a RAROC model. The RAROC model, computed for each specific activity, measures the ratio of the expected yearly net income to the yearly VAR risk estimate. You are asked to estimate the RAROC of its $500 million loan business. The average interest rate is 10%. All loans
Continuing with the same ABC Bank data, which of the following statements is correct in relation to the equity trader?I. The equity trader has an annual, after-tax VAR at a 99% confidence level of USD 33.2 million.II. In comparing the RAROC for both traders, the equity trader is performing better
A risk manager for ABC Bank has compiled the following data regarding a bond trader and an equity trader. Assume that the returns are normally distributed and that there are 52 trading weeks per year. ABC Bank computes its capital using a 99% VAR. Dollar amounts are in millions.After-Tax Net Book
Your bank calculates a one-day 95% VAR for market risk, a one-year 99%VAR for operational risk, and a one-year 99% VAR for credit risk. The measures are $100 million, $500 million, and $1 billion, respectively. Operational risk is defined to include all risks that are not market risks and credit
Counterparty A is an American company with manufacturing operations in Indonesia and its main customers in the United States, while counterparty B is an American company that manufactures its goods domestically and exports solely to Indonesia. Which one of the following transactions with either
Large banks typically allocate risk capital for credit, operational, and market/ALM risks. Which of the following statements ranks the typical amount of risk capital allocated to these different risks correctly?a. Market/ALM risk requires more risk capital than credit risk.b. Credit risk requires
Consider a bank that wants to have an amount of capital so that it can absorb unexpected losses corresponding to a firmwide VAR at the 1% level. It measures firmwide VAR by adding up the VARs for market risk, operational risk, and credit risk. There is a risk that the bank has too little capital
Tower Bank approaches economic capital and risk aggregation by first estimating the stand-alone economic capital for individual risk factors. In a second step, the bank aggregates risks based on the relative amounts of economic capital allocated to these risks, taking into account the correlations
Your CRO asks you to prepare a list of early warning indicators for liquidity problems for your bank. Which of the following are early warning indicators of a potential liquidity problem?I. Rapid asset growth, especially when funded with potentially volatile liabilities II. Growing concentrations
You have been asked to review a memo on how market liquidity is affected by shocks to the financial system. Which of the following observations made in the memo is incorrect?a. In periods of acute market stress, market liquidity typically increases in the most liquid markets, creating a
You are a risk manager for a hedge fund. You are told that the TED spread increased sharply. Which of the following statements best describes the change in your situation?a. An increase in the TED spread indicates that the Federal Reserve will push interest rates up, so the duration of the
You are a manager of a renowned hedge fund and are analyzing a 1,000-share position in an undervalued but illiquid stock BNA, which has a current stock price of USD 72 (expressed as the midpoint of the current bid-ask spread). Daily return for BNA has an estimated volatility of 1.24%. The average
You are holding 100 Wheelbarrow Company shares with a current price of $50. The daily mean and volatility of the stock return is 1% and 2%, respectively. VAR should be measured relative to the initial wealth. The bidask spread of the stock varies over time. The daily mean and volatility of the
In a market crash, which the following are usually true?I. Fixed-income portfolios hedged with short Treasury bonds and futures lose less than those hedged with interest rate swaps given equivalent durations.II. Bid-offer spreads widen because of lower liquidity.III. The spreads between off-the-run
The following statements compare a highly liquid asset against an (otherwise similar) illiquid asset. Which statement is most likely to be false?a. It is possible to trade a larger quantity of the liquid asset without affecting the price.b. The liquid asset has a smaller bid-ask spread.c. The
Which of the following statements regarding liquidity risk is correct?a. Asset liquidity risk arises when a financial institution cannot meet payment obligations.b. Flight to quality is usually reflected in a decrease in the yield spread between corporate and government issues.c. Yield spread
Which of the following statements regarding Basel II nonadvanced approaches is incorrect?a. The standardized approach makes it advantageous for a bank to book losses early if doing so reduces this year’s gross income sufficiently to make it negative.b. Corporate finance, trading and sales, and
Which of the following statements about its methodology for calculating an operational risk capital charge in Basel II is correct?a. The basic indicator approach is suitable for institutions with sophisticated operational risk profiles.b. Under the standardized approach, the capital requirement is
Which of the following approaches for calculating operational risk capital charges leads to a higher capital charge for a given accounting income as risk increases?a. The basic indicator approachb. The standardized approachc. The advanced measurement approachd. All of the above
The following statements concern differences between market and operational risk VAR models. Which of the following statements is false?a. Market risk models are primarily driven by historical data, whereas operational risk models are more flexible in this regard.b. Market risk models typically
Which of the following statements are valid about hedging operational risk?I. A primary disadvantage of insurance as an operational risk management tool is the limitation of policy coverage.II. If an operational risk hedge works properly, a firm will avoid damage to its reputation from a
Insurance is an effective tool to transfer which of type of operational risk?a. High frequency, low severityb. Low frequency, high severityc. Operational losses whose magnitude is affected by the actions of the companyd. Operational losses for which insurance companies only sell policies with low
Which of the following options does not describe a problem faced by banks when purchasing insurance as a hedge against operational risk?a. The fact that the loss reimbursement period can take several yearsb. The credit rating of insurersc. The different perspective of operational risk between banks
Which of these terms is used in the insurance industry to refer to the effect of a reduction in the control of losses by an individual who is insured because of the protection provided by insurance?a. Control trapb. Moral hazardc. Adverse selectiond. Control hazard

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Financial Risk Manager Handbook 6th Edition Philippe Jorion - Solutions

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