QUESTION 2 - the age of VaR

A risk manager is presented with a Value at Risk (VaR) measure of a complex diversified derivatives portfolio. The VaR is a single statistic intended to express the maximum one day loss within a 99% confidence limit. The VaR indicates the potential for loss is too high. The risk manager must formulate directly an effective hedge or hedges to reduce the portfolio's market risk exposure.

A. The risk manager can do this simply by knowing the VaR.
B. The asset types, not specific instrument details, in the portfolio          must also be known.
C. The asset types, spot and forward market rates must also be          known.
D. The risk manager cannot determine the required hedge(s) given only          the VaR, the relevant asset types and market data.

QUESTION 3 - exposed to what?

A corporate enters into a long term FX forward to hedge a contingent liability. The hedge may need to be closed and settled at any time. The present value of the profit or loss on the hedge is, in general, exposed to:

A. Changes in the spot (exchange) rate only.
B. Changes in the spot rate and the domestic interest rate only.
C. Changes in the spot rate and the interest rates of both          currencies only.
D. Changes in the spot rate, both interest rates as well as time lapse.
E. No market rates once a reverse FX forward with equal face value          and maturity is entered into.

QUESTION 4 - is this real?

A trader performs a stress test on an interest rate related derivatives portfolio using uniform yield shifts with time and all other economic parameters unchanged. The portfolio seems to profit when yields increase. It also appears to profit when yields decrease.

A. This suggests the net delta is zero and gamma is zero or positive.
B. This suggests the stress analysis software is defective - this result          violates arbitrage theory.
C. This suggests the portfolio will tend to gain value as time lapses.
D. This effect can occur only if options are present in the portfolio.

QUESTION 5 - does it matter?

An exporter can use either FX futures or forwards to hedge a long dated FX exposure. Both futures and forwards are available with expiries coinciding with the payment date. Domestic and foreign currency interest rates exceed 10%.To achieve near risk equivalence, the face value of the futures contracts:

A. Should be greater than an equivalent forward contract.
B. Should be less than a forward contract.
C. Should be the same as a forward contract.
D. May be greater or less than a forward, depending on which          currency has the higher interest rate.

QUESTION 6 - a fundamental thing

The critical dimension, that is the fundamental unit of measure, of a simple interest rate is:

A. A unit of the currency of the underlying instrument (e.g. dollars of          US dollar based instruments).
B. It has no dimension, interest rates are dimensionless numbers.
C. 1/Time.
D. Time.
E. %

QUESTION 7 - the business of banking

A banker uses interest rate derivatives to manage a fixed rate mortgage portfolio. The Bank's board views exposure management based on rate forecasts as speculative and prohibits it. A careful stress analysis indicates that the portfolio contains risk holes, it is exposed to yeild curve changes. The risk manager then formulates and executes a hedge parcel that reduces significantly market risk exposure. With less market risk the expected or average profit to the bank:

A. Increases.
B. Decreases, but only by the amount of the hedge parcel transaction          costs.
C. Decreases significantly since less risk means less return.
D. Stays the same.
E. May increase or decrease.

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