QUESTION FOUR

a)

All tranches in an ABS have the same risk exposure. Discuss critically if this statement is

true or false. (10 Marks)

b)

Discuss the main differences between hedge funds and mutual funds. (10 Marks)

c)

Explain the term short selling and provide an example. (10 Marks)

d)

How do you (Chief Risk Officer) choose the appropriate confidence interval when

calculating Value-at-Risk (VaR)? What happens to your VaR if you increase the

confidence? (10 Marks)

e)

Briefly explain the importance of backtesting in Value-at-Risk (VaR) and briefly explain how

Value-at-Risk (VaR) models are back tested. (10 Marks)

[TOTAL: 50 MARKS]