Question 1

A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?

Options :

A :

His overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million.

B :

His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.

C :

His overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million

D :

His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.

Answer: D

Question 2

Which one of the following four statements about the relationship between exchange rates and option values is correct?

Options :

A : As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases

B : As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.

C : As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.

D : As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases.

Answer: B

Question 3

Which one of the following four statements about market risk is correct? Market risk is

Options :

A :

The exposure to an adverse change in the credit quality in portfolios or of financial

instruments.

B : The maximum likely loss in the market value of portfolios and financial instruments over
a given period of time.

C :

The maximum likely loss in the market value of portfolios and financial instruments

caused by the failure of the counterparty to meet its obligations.

D :

The exposure to an adverse change in the market value of portfolios and financial

instruments caused by a change in market prices or rates.

Answer: D

Question 4

Which of the following attributes of duration gap model typically cause criticism?

I. Basis risk

II. Errors in the linear model

III. Costs of immunization

IV. Constant nature of calculation

Options :

A : I, II

B : II, III, IV

C : I, II, III

D : I, III, IV

Answer: C

Question 5

Which one of the following statements describes Macauley's duration?

Options :

A : The change in value of a bond when yields increase by 1 basis point.

B : The weighted average life of the bond payments.

C : The present value of the future cash flows of a bond calculated at a yield equal to 1%.

D : The percentage change in a bond price when the yields change by 1%.

Answer: B

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