101. Given the information provided in the table below, what is the risk budget, at the 99% confidence level of the following CHF million equally weighted investment portfolio?

Asset       Expected Return      Volatility          Correlation

                                              Stocks   Bonds

Stocks          24.00%            18%           1      0.1

Bonds          15.00%             6%           0.1     1

a. CHF 20.97 million

b. CHF 13.98 million

c. CHF 27.96 million

d. CHF 22.77 million

102. The Chief Risk Officer (CRO) of an exporting firm is attempting to estimate the firm’s one-year cash flow at risk. Which of the following issues describes an approach that is irrelevant to the task to the CRO?

a. Because cash flow at risk is generally estimated over a quarter or over a year, it is necessary to forecast the future values of risk factors.

      b. To the extent that the firm’s income from exports is best approximated by a real option because the firm does not have to export when the price of the foreign currency is unexpectedly low, the CRO can use option analysis and does not have to worry about forecasting exchange rates.

c. A parametric approach can be used if exposures to foreign exchange risk factors are linear, if there are no other risk factors, and if exchange rate changes are normally distributed.

      d. Using a Monte Carlo approach will help the CRO if the firm’s foreign currency income is a nonlinear function of exchange rates.

103. A single stock has a price of USD 10 and a current daily volatility of 2%. Using the delta-normal method, the VaR at the 95% confidence level of a long at-the-money call on this stock over a one-day holding period is approximately

a.       USD 1.645

b.       USD 0.16

c.       USD 0.33

d.       USD 0.23

104. Your bank is using the internal models approach to estimate its general market risk charge. The multiplication factor ‘k’, set by the regulator, is 3 and banks are allowed to use the square root rule to scale daily VaR. The previous day’s one-day VaR estimate is EUR 3 million, and the average of the daily VaR over the last 60 days is EUR 2 million. Given the above information, what will be the market risk charge for your bank?

a.       EUR 9.49 million

b.       EUR 28.46 million

c.       EUR 6.32 million

d.       EUR 18.97 million

105. A portfolio manager has a bond position worth USD 100 million. The position has a modified duration of eight years and a convexity of 150 years. Assume that the term structure is flat. By how much does the value of the position change if interest rates increase by 25 basis points?

a.       USD -2,046,875

b.       USD -2,187,500

c.       USD -1,953,125

d.       USD -1,906,250