Question
MARKET RISK MANAGEMENT *TAKE YOUR TIME, READ QUESTIONS AND ANSWER CORRECTLY* QUESTION 1 A binary option pays off $165 if a stock price is greater
MARKET RISK MANAGEMENT
*TAKE YOUR TIME, READ QUESTIONS AND ANSWER CORRECTLY*
QUESTION 1
A binary option pays off $165 if a stock price is greater than $65 in three months. The current stock price is $50 and its volatility is 40%. The risk-free rate is 4% and the expected return on the stock is 10%. Note that some of the subsequent values were assumed and not calculated.
1. The risk-neutral probability of the payoffs (d2) is(1)............?.
Enter the amount, either negative (e.g., -5.6789) or positive (e.g., 5.6789), rounded to four decimals.
2.Assume that d2 was calculated as - 1.4250 (minus 1.4250), use the tables to determine N(-d2), and use interpolation.
The probability is, therefore (2)...........?.
Enter the four-decimal cumulative probability (e.g., 0.5832).
3. What will the value of the option be if N(-d2) were determined to be 0.1072?
The value of the option is $ (3)............?.
Round your answer to two decimal places (e.g., 12.23)
QUESTION 2
1. Value at Risk (VaR) and Expected Shortfall (ES) aims to provide a single number that summarise the total risk of the portfolio.
TRUE | FALSE |
2. Backtesting for Expected Shortfall (ES) is easier than for Value at Risk (VaR).
TRUE | FALSE |
3. The historical simulation involves the use of today's data as a guide to what will happen in the future.
TRUE | FALSE |
4. Periods of high volatility in the market will tend to give higher values for Value at Risk (VaR) and Expected Shortfall (ES).
TRUE | FALSE |
5. An advantage of the Monte Carlo simulation is that it does not have to assume the risk factors are normally distributed.
TRUE | FALSE |
QUESTION 3
1. A financial institution owns a portfolio of options dependent on the US dollar-sterling exchange rate. The delta of the portfolio with respect to percentage changes in the exchange rate is 6.1. If the daily volatility of the exchange rate is 0.5% and a linear model is assumed.
The estimated 10-day99% VaR is $ (1).........?.
Round your final answer to four decimal places (e.g., 0.2345)
2. A fund manager announces that the fund's three-month 99% VaR is 8.2% of the size of the portfolio being managed. You have an investment of R1,000,000 in the fund.
There is a 1% chance that you will (2) win / lose ?, R (3)..........? or more during a three-month period.
Enter a numerical number without spaces or commas for thousand separators (E.g 24000)
QUESTION 4
1. Suppose we estimate the one-day 97.5% VaR from 1,100 observations as 5 (in millions of dollars). By fitting a standard distribution to the observations, the probability density function of the loss distribution at the 97.5% point is estimated to be 0.04.
The standard error of the VaR estimate is $ (1)...........? million.
Round your answer to two decimal places (e.g.,0.15million)
2. A financial institution owns a portfolio of options dependent on the US dollar-sterling exchange rate. The delta of the portfolio with respect to percentage changes in the exchange rate is 6.5. If the daily volatility of the exchange rate is 0.5% and a linear model is assumed.
The estimated 10-day 99% VaR is $ (2).........?.
Round your final answer to two decimal places (e.g., 12.23)
*TAKE YOUR TIME, READ QUESTIONS AND ANSWER CORRECTLY*
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