Market Risk Management Flashcards

What is the 'Greeks' in options risk management?

Answer: Sensitivity measures that describe how an option's price changes with market variables

The Greeks (delta, gamma, theta, vega, rho) quantify how an option's value responds to changes in underlying price, time, volatility, and interest rates.

Gamma risk in options refers to:

Answer: The risk that the delta of an option changes as the underlying price moves

Gamma measures the rate of change of delta, so high gamma means delta is unstable and the position requires frequent re-hedging.

Under the Basel III framework, what is the Fundamental Review of the Trading Book (FRTB)?

Answer: A revised market risk capital framework replacing the internal models approach

FRTB is Basel III's revamped market risk capital standard, replacing VaR with Expected Shortfall and tightening internal model standards.

What is 'wrong-way risk' in the context of market risk?

Answer: The risk that exposure to a counterparty increases as the counterparty's creditworthiness deteriorates

Wrong-way risk occurs when credit exposure to a counterparty is positively correlated with the counterparty's probability of default.

A portfolio manager uses a duration of 5 years for a bond portfolio. If interest rates rise by 100 basis points, the approximate price change is:

Answer: -5%

The approximate price change equals negative duration times the change in yield, so −5 × 0.01 = −5%.

Which approach for market risk VaR uses actual historical market returns without distributional assumptions?

Answer: Historical simulation

Historical simulation applies actual past returns to the current portfolio to estimate the distribution of possible losses without assuming normality.