Financial Risk Management Market Risk Management 1

Question 1

What does Value at Risk (VaR) measure in market risk management?

Accepted Answer

The maximum expected loss over a given time horizon at a specified confidence level

Answer

The average return of a portfolio over one year

Answer

The total notional value of all derivative positions

Answer

The minimum capital required by regulators

Question 2

Which of the following best describes delta in the context of options market risk?

Accepted Answer

The rate of change of an option's price relative to a $1 change in the underlying asset

Answer

The sensitivity of an option's price to changes in volatility

Answer

The time decay of an option's premium per day

Answer

The second-order sensitivity to interest rate changes

Question 3

A 10-day VaR at 99% confidence is $1 million. What does this mean?

Accepted Answer

There is a 1% chance losses will exceed $1 million over the next 10 days

Answer

The firm will lose exactly $1 million over 10 days

Answer

The firm expects to gain $1 million with 99% probability

Answer

Losses will average $1 million per trading day

Question 4

What is the primary limitation of VaR as a risk measure?

Accepted Answer

It does not capture losses beyond the confidence threshold (tail risk)

Answer

It is too conservative for regulatory purposes

Answer

It cannot be applied to fixed income portfolios

Answer

It overestimates risk during normal market conditions

Question 5

Which market risk factor primarily affects the value of fixed income securities?

Accepted Answer

Interest rate changes

Answer

Equity beta

Answer

Foreign exchange volatility

Answer

Commodity price shifts

Question 6

Stress testing in market risk is used to:

Accepted Answer

Evaluate portfolio performance under hypothetical or historical extreme scenarios

Answer

Determine the exact probability of extreme market events

Answer

Calculate daily margin requirements for derivatives

Answer

Replace VaR as the sole risk measure under Basel III