First Risk Olympics™ is a worldwide competition for derivatives professionals. It consists of multiple choice questions designed to test and develop risk intuition. All questions can be answered intuitively; you don't need to be a rocket scientist to win.

You may play anonymously but we invite you to fill out the contact details so that we can inform you of upcoming heats and send you a response sheet.

Answer all questions. Only one answer is considered correct for each question.

Bang. Go...

QUESTION 1 -Bonds and forwards

A three year 10% coupon bond (fixed interest rate instrument) is trading at par. A risk manager determines the sensitivity of the bond's price to a 1 basis point change in various 90 day forwards. In general, which forward rate should the risk manager expect the bond's price to be most sensitive to?

A. A near dated forward.
B. A forward with maturity close to the bond's duration.
C. A forward with maturity coinciding with the bond's         maturity.
D. The manager is unlikely to know until a thorough stress         analysis is performed.

QUESTION 2 - The VaR thing

A risk manager is presented with a Value at Risk (VaR) measure for two derivatives portfolios, Port1 and Port2. The VaR is a single statistic intended to express the maximum one day loss within a 99% confidence limit. Both VaRs are within policy limits. But the VaR of Port1 is much less than the VaR of Port2. The risk manager must decide which portfolio is more exposed to a sudden large jump in market rates - outliers exceeding the 99% confidence limit.

A. Port1 is definitely safer than Port2.
B. Port2 is definitely safer than Port1.
C. Port1 may be more exposed than Port2.
D. Neither portfolio can produce unexpected results.

QUESTION 3 - FRA exposure

A risk manager analyses the present value sensitivity of a single 90 day borrowers FRA to isolated movements in various forward rates. A borrowers FRA is used to protect against rising forward interest rates. In present value terms, in general, the risk manager should expect the FRA:

A. To always profit from a rising forward rate.
B. To incur a profit or loss from a rising forward rate.
C. To be insensitive to time lapse.
D. To be equivalent to a pure discount bond.

QUESTION 4 - Foreign currency loans

A corporate enters into a long term foreign currency loan and immediately converts the proceeds to their domestic currency. No exchange rate hedge is used. At the time to repay the principal, the foreign currency required is purchased on the spot exchange market using domestic currency. The amount of domestic currency required to repay the principal may be:

A. Up to 50% more than the amount of domestic currency         originally received.
B. Up to 100% more than the amount originally received.
C. Up to 200% more than the amount originally received.
D. More than 200% of the amount originally received.

QUESTION 5 - Gamma zero?

In Heat 1 the following QUESTION appeared:

"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 appears to profit when yields increase. It also appears to profit when yields decrease".

The most popular answer which a minority of players selected was choice A "This suggests the net delta is zero and gamma is zero or positive". The Games Master also chose A. However, a number of astute people commented that the gamma could not be zero.

A. The Game producers made a slight error - the gamma         cannot be zero.
B. The Game producers made a slight error - the gamma         can also be negative.
C. The Game producers were careful to include all         possiblities because some exotic instruments can         produce this effect.
D. The Game producers were careful to include all         possiblities because this effect can occur even with         rather elementary instruments such as simple cash flow         portfolios.

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