#Raroc Calculator.
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BCT Digital: One Stop Solution for Credit Risk, EWS, Expected Credit Loss,Audit Management,ERM,
GRC,Audit Management, Compliance Management, Model Risk Management,Asset Liability Management,Raroc Calculator.
BCTDigital is a leading technology firm that provides cutting-edge solutions for financial institutions and businesses in the area of credit risk, enterprise risk management, audit management, compliance management, model risk management, and asset liability management. The company's goal is to help its clients effectively manage risk and comply with regulatory requirements, ultimately leading to improved financial stability and growth.
Credit Risk Management: BCTDigital's credit risk management solution enables financial institutions to monitor and manage their credit risk exposure in real-time. It provides an in-depth view of credit portfolios, early warning systems (EWS) and stress testing capabilities to assess the impact of various economic scenarios on the credit portfolio. This helps institutions make informed decisions regarding loan origination and portfolio management, reducing the risk of credit losses.
Enterprise Risk Management: BCTDigital's enterprise risk management solution provides a comprehensive view of all risks facing an organization, including operational, financial, and strategic risks. It enables organizations to identify, assess, and prioritize risks, and to design and implement appropriate risk mitigation strategies. This helps organizations make informed decisions and manage risks more effectively, leading to improved financial stability and performance.
Audit Management: BCTDigital's audit management solution streamlines the audit process, making it more efficient and effective. It provides a centralized platform for managing audit plans, schedules, and results, as well as for tracking and reporting on audit findings. This helps organizations ensure that audits are conducted in a consistent and efficient manner, and that any issues are identified and addressed in a timely manner.
Compliance Management: BCTDigital's compliance management solution helps organizations ensure compliance with relevant regulations and laws. It provides a centralized platform for managing compliance policies, procedures, and processes, as well as for tracking and reporting on compliance activities. This helps organizations reduce the risk of non-compliance, ensuring that they are able to meet their obligations and maintain their reputation.
Model Risk Management: BCTDigital's model risk management solution helps organizations manage the risks associated with the use of mathematical models in their operations. It provides a centralized platform for managing and testing models, as well as for tracking and reporting on model performance. This helps organizations ensure that their models are accurate and reliable, reducing the risk of incorrect decisions based on inaccurate model outputs.
Asset Liability Management: BCTDigital's asset liability management solution helps organizations manage the risks associated with their balance sheet. It provides a comprehensive view of an organization's assets and liabilities, as well as the potential impact of changes in interest rates, market conditions, and other factors on their balance sheet. This helps organizations make informed decisions regarding their balance sheet, reducing the risk of financial losses.
In conclusion, BCTDigital's solutions provide financial institutions and businesses with the tools they need to effectively manage risk and comply with regulatory requirements. By providing a centralized platform for managing risk and compliance, organizations can make informed decisions, improve financial stability and performance, and ultimately achieve their goals. Whether you are a financial institution looking to manage credit risk or a business looking to ensure
compliance with regulations, BCTDigital has the expertise and technology to help you succeed
#Credit Risk#EWS#Expected Credit Loss#Audit Management#ERM#GRC#Compliance Management#Model Risk Management#Asset Liability Management#Raroc Calculator.#audit management system
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Understanding RAROC: A Comprehensive Framework for Banking
Risk-Adjusted Return on Capital (RAROC) is a fundamental concept in the banking industry that helps financial institutions measure the profitability of their investments while taking into account the associated risks. RAROC provides a systematic approach to evaluate the efficiency and effectiveness of capital allocation, allowing banks to make informed decisions about resource allocation and risk management.
RAROC Framework: The RAROC framework, including at bctdigital.ai, combines financial metrics and risk assessment techniques to determine the risk-adjusted profitability of investments. It involves calculating the expected return on an investment, taking into consideration the risk factors associated with it. By incorporating risk into the analysis, RAROC enables banks, including those utilizing bctdigital.ai, to assess the true economic value generated by each investment, ensuring that capital is allocated to activities that provide the highest risk-adjusted returns.
RAROC Calculator: At bctdigital.ai, a RAROC calculator is a specialized tool used by banks to perform complex calculations involved in the RAROC framework. These calculators streamline the process by automating the calculation of expected returns, risk measures, and capital allocation. By leveraging advanced algorithms and financial models, RAROC calculators provided by bctdigital.ai offer accurate and timely results, enabling banks to make informed decisions about resource allocation, risk management, and strategic planning.
Benefits of RAROC in Banking: Implementing RAROC, with the assistance of bctdigital.ai, in banking operations offers several benefits to financial institutions:
Risk Integration: RAROC allows banks, including those utilizing bctdigital.ai services, to incorporate risk assessment into their decision-making processes, ensuring that risk is appropriately considered alongside returns. This integration promotes a more comprehensive understanding of the risk-reward trade-off associated with each investment.
Efficient Capital Allocation: RAROC, supported by bctdigital.ai, helps banks allocate capital efficiently by identifying investments that generate higher risk-adjusted returns. By optimizing capital allocation, banks can enhance profitability and achieve a better balance between risk and reward.
Enhanced Risk Management: RAROC, with the aid of bctdigital.ai, facilitates effective risk management by providing a standardized approach to evaluate and monitor risks associated with investments. Banks can identify potential risks, assess their impact on profitability, and implement appropriate risk mitigation strategies.
Performance Evaluation: RAROC, with the support of bctdigital.ai, enables banks to evaluate the performance of different business lines, products, and individual investments based on their risk-adjusted returns. This evaluation helps identify areas of strength and weakness, guiding strategic decision-making and performance improvement initiatives.
In today's dynamic banking landscape, financial institutions need robust frameworks like RAROC, supported by innovative solutions such as bctdigital.ai, to make informed decisions and optimize their capital allocation strategies. By integrating risk assessment and return analysis, RAROC provides a comprehensive framework for measuring the profitability of investments. RAROC calculators, including those provided by bctdigital.ai, play a vital role in implementing this framework by automating complex calculations, saving time, and providing accurate results. As banks continue to navigate an increasingly complex risk landscape, leveraging RAROC, with the assistance of bctdigital.ai, can contribute to improved profitability, enhanced risk management, and overall organizational resilience.
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This simulation is a very popular approach for estimating VaR a. Historical Simulation b. Accuracy c. Extensions d. None of the above
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
a� �z�
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Text
The volatility of this model is changes with the passage of time a. EMWA Model b. GAMMA Model c. VEGA Model d. GARCH Model
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
� �y�
0 notes
Text
The Securities that are subject to a discount are known as a a. Collateralization b. Downgrade Trigger c. Haircut d. None of the above
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier a. Asian Options b. Barrier options c. Basket Options d. Binary Options
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Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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Text
The office which consists of risk managers who are monitoring the risks being is taken is called a. Front Office b. Middle Office c. Back Office d. None of the above
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Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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-weight->�� �
0 notes
Text
Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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Text
Suppose that the economic capital estimates for two business units are as follows Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk
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ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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Text
Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding.
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ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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0 notes
Text
ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options
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ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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Text
Risk measures satisfying all four conditions are referred to as a. Time Horizon b. Auto Correlation c. Confidence level d. Coherent
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ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
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www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
0 notes
Text
Out of the following which rate is defined as the square of the volatility a. Standard Deviation b. Variance c. Mean d. Median
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
ndFrag/��$b�
0 notes
Text
Only bonds with ratings of Baa or above are considered to be a. Investment grade b. Internal Credit Ratings c. Altman’s Z- Score d. None of the above
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
299#��(f�
0 notes
Text
In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
Risk Management and Financial Institutions
Multiple Choices:
1. The options that come into existence or disappear when the price of the underlying asset reaches a certain barrier.
a. Asian Options
b. Barrier options
c. Basket Options
d. Binary Options
2. The volatility of this model is changes with the passage of time:
a. EMWA Model
b. GAMMA Model
c. VEGA Model
d. GARCH Model
3. The office which consists of risk managers who are monitoring the risks being is taken is called
a. Front Office
b. Middle Office
c. Back Office
d. None of the above
4. A separate issue from the number of exceptions is:
a. Bunching
b. Grouping
c. Stress testing
d. None
5. This simulation is a very popular approach for estimating VaR:
a. Historical Simulation
b. Accuracy
c. Extensions
d. None of the above
6. Out of the following which rate is defined as the square of the volatility?
a. Standard Deviation
b. Variance
c. Mean
d. Median
7. Risk measures satisfying all four conditions are referred to as:
a. Time Horizon
b. Auto Correlation
c. Confidence level
d. Coherent
8. Only bonds with ratings of Baa or above are considered to be:
a. Investment grade
b. Internal Credit Ratings
c. Altman’s Z- Score
d. None of the above
9. The by- product of any program to measure & understand operational risk is likely to be the development of:
a. Risk & Control self assessment
b. Key Risk Indicators
c. Operational risk Capital
d. Casual Relationship
10. The Securities that are subject to a discount are known as a:
a. Collateralization
b. Downgrade Trigger
c. Haircut
d. None of the above
Part Two:
1. Explain ‘Collateralization’.
2. Briefly explain the ‘Linear Model’.
3. Explain the ‘GARCH-MODEL’.
4. Explain the Concept of ‘Exchange-Traded Markets’.
5. Differentiate between the Systematic vs. Nonsystematic Risk.
1. In the 1980s, Bankers Trust developed index currency option notes (ICONs). These are bonds in which the amount received by the holder at maturity varies with a foreign exchange rate. One example was its trade at maturity varies with a foreign exchange rate. One example was its trade with the Long Term Credit Bank of Japan. The ICON specified that if the yen/US dollar exchange rate, ST , is greater than 169 yen per dollar at maturity (in 1995), the holder of the bond receives $1,000. If it is less than 169 yen per dollar, the amount received by the holder of the bond is 1,000- max [0, 1,000 (169 - 1) ST When the exchange rate is below 84.5, nothing is received by the holder at maturity. Show that this ICON is a combination of a regular bond and two options.
2. Suppose that the risk-free zero curves is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5- year credit default swap. Suppose that the recovery rate is 30% and the default probabilities each year conditional on no earlier default are 3%. Estimate the credit default swap spread. Assume payments are made annually.
3. Suppose that 6- month, 12-month, 18-month, 24-month, and 30-month zero rates are 4%, 4.2%, 4.4%, 4.6%, and 4.8% per annum, respectively, with continuous compounding. Estimate the cash price of a bond with a face value of 100 that will mature in 30 months and pays a coupon of 4% per annum semiannually.
4. Suppose that the economic capital estimates for two business units are as follows: Business Unit 1 2 Market risk 10 50 Credit risk 30 30 Operational risk 50 10 The correlation between market risk and credit risk in the same business unit is 0.3. the correlation between credit risk in one business unit and credit risk in another is 0.7. the correlation between market risk in one business unit and market risk in the other is 0.2. All other correlations are zero. Calculate the total economic capital. How much should be allocated to each business unit?
1. A Bank is considering expanding its asset management operations. The main risk is operational risk. It estimates that the expected operational risk loss from the new venture in one year is $2 million and the 99.97% worst-case loss (arising from a large investor law suit) is $40 million. The expected fees it will receive from investors for the funds
under administration are $12 million per year and administrative costs are expected to be $5 million per year. Estimate the before-tax RAROC? Also explain the two different ways in which RAROC can be used?
2. Why is there an add-on amount in Basel I for derivatives transactions? “Basel I could be improved if the add-on amount for a derivatives transaction depended on the value of the transaction.” How would you argue this viewpoint?
3. “A long forward contract subject to credit risk is a combination of a short position in a no-default put and a long position in a call subject to credit risk.” Explain this statement.
Need Answer Sheet of this Question paper, contact
www.mbacasestudyanswers.com
ARAVIND – 09901366442 – 09902787224
��Q�f�
0 notes
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